Podcast
Questions and Answers
Shareholders are the ones who bear the risk in the agency relationship
Shareholders are the ones who bear the risk in the agency relationship
True
Executive compensation is not based on incentive-based models
Executive compensation is not based on incentive-based models
False
The separation of ownership and managerial control is the basis of the modern corporation
The separation of ownership and managerial control is the basis of the modern corporation
True
The main purpose of a compensation plan is to provide the right incentives
The main purpose of a compensation plan is to provide the right incentives
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ESG metrics are more commonly included in compensation contracts in countries where ESG reporting is already mandatory
ESG metrics are more commonly included in compensation contracts in countries where ESG reporting is already mandatory
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ESG Pay is associated with firms that have publicly issued environmental commitments
ESG Pay is associated with firms that have publicly issued environmental commitments
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ESG Pay is associated with firms that have smaller boards with a lower percentage of female members
ESG Pay is associated with firms that have smaller boards with a lower percentage of female members
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Firms linking ESG performance to executive compensation receive on average more favorable ESG scores from outside rating agencies
Firms linking ESG performance to executive compensation receive on average more favorable ESG scores from outside rating agencies
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The inclusion of a measure specifically related to emissions in the contract is associated with an increase in carbon emissions
The inclusion of a measure specifically related to emissions in the contract is associated with an increase in carbon emissions
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There is a positive association between ESG Pay and financial outcomes such as return on assets
There is a positive association between ESG Pay and financial outcomes such as return on assets
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Stock and option incentives are believed to solve agency problems perfectly
Stock and option incentives are believed to solve agency problems perfectly
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The PPE measure of incentives is related to firm performance
The PPE measure of incentives is related to firm performance
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Fractional ownership as a measure of incentives is problematic because firms differ in size and CEOs differ in their wealth
Fractional ownership as a measure of incentives is problematic because firms differ in size and CEOs differ in their wealth
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Incentives should be positively related to firm performance
Incentives should be positively related to firm performance
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Optimal incentives do not differ across firms/industries
Optimal incentives do not differ across firms/industries
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Nowadays, IFRS 2 and FAS 123(R) take into account the value of the option at grant date and amortize that value during the life of the option or vesting period
Nowadays, IFRS 2 and FAS 123(R) take into account the value of the option at grant date and amortize that value during the life of the option or vesting period
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Severance multiples for executives have increased over time, as perks represent a larger portion of total compensation.
Severance multiples for executives have increased over time, as perks represent a larger portion of total compensation.
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Share ownership guidelines require executives to hold a certain number of shares, often defined as a multiple of base salary.
Share ownership guidelines require executives to hold a certain number of shares, often defined as a multiple of base salary.
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Clawback policies give companies the right to recover incentive compensation if performance was based on erroneous information.
Clawback policies give companies the right to recover incentive compensation if performance was based on erroneous information.
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The CEO pay ratio requires disclosure of the median total annual compensation of all employees and the ratio of employee median to CEO total compensation.
The CEO pay ratio requires disclosure of the median total annual compensation of all employees and the ratio of employee median to CEO total compensation.
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Determining executive compensation involves benchmarking and the use of compensation consultants by the compensation committee.
Determining executive compensation involves benchmarking and the use of compensation consultants by the compensation committee.
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In 2018, Nokia complied with the Finnish Corporate Governance Code, except for restricted share plans lacking performance criteria.
In 2018, Nokia complied with the Finnish Corporate Governance Code, except for restricted share plans lacking performance criteria.
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Various countries have the same regulations and legislation governing executive compensation, influencing compensation strategies.
Various countries have the same regulations and legislation governing executive compensation, influencing compensation strategies.
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Incentive-based compensation raises concerns about pay-for-performance sensitivity and the potential for excessive risk-taking.
Incentive-based compensation raises concerns about pay-for-performance sensitivity and the potential for excessive risk-taking.
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Theories explaining CEO compensation include rent extraction, competitive pay, managerial power, management talent, technology change, and general managerial skills.
Theories explaining CEO compensation include rent extraction, competitive pay, managerial power, management talent, technology change, and general managerial skills.
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Potential incentive problems with accounting-based and stock option incentives include manipulation of accounting results and excessive risk-taking.
Potential incentive problems with accounting-based and stock option incentives include manipulation of accounting results and excessive risk-taking.
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An international perspective on CEO compensation shows variations in the percentage of fixed and variable pay across different countries.
An international perspective on CEO compensation shows variations in the percentage of fixed and variable pay across different countries.
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Research has shown that executive compensation is influenced by factors such as fractional ownership, managerial talent, and technology change.
Research has shown that executive compensation is influenced by factors such as fractional ownership, managerial talent, and technology change.
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Employers aim to attract, retain, and motivate employees but do not need to align their interests with shareholders.
Employers aim to attract, retain, and motivate employees but do not need to align their interests with shareholders.
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Employees are only interested in compensation and do not care about employment security or post-employment termination.
Employees are only interested in compensation and do not care about employment security or post-employment termination.
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Compensation determination involves estimating company value creation, CEO's attributable efforts, and fair compensation percentage.
Compensation determination involves estimating company value creation, CEO's attributable efforts, and fair compensation percentage.
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Compensation levels are practically determined through guesswork and without input from remuneration committees and compensation consultants.
Compensation levels are practically determined through guesswork and without input from remuneration committees and compensation consultants.
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Short-term incentives include base salary and bonus compensation based on performance goals.
Short-term incentives include base salary and bonus compensation based on performance goals.
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Bonus compensation aims to motivate performance but does not align executives with the company's short-term objectives.
Bonus compensation aims to motivate performance but does not align executives with the company's short-term objectives.
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Long-term incentives are only based on achievement of goals over a period exceeding one year.
Long-term incentives are only based on achievement of goals over a period exceeding one year.
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Stock grants, including restricted stock and performance shares, aim to align executive and shareholder interests, attract, retain, and motivate employees, and create wealth.
Stock grants, including restricted stock and performance shares, aim to align executive and shareholder interests, attract, retain, and motivate employees, and create wealth.
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Stock options always lead to increased risk-taking and dilution, and are always tied to the company's financial performance.
Stock options always lead to increased risk-taking and dilution, and are always tied to the company's financial performance.
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Other compensations include only perquisites and retirement compensation, but not severance pay.
Other compensations include only perquisites and retirement compensation, but not severance pay.
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Executive compensation is primarily based on incentive-based models
Executive compensation is primarily based on incentive-based models
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The separation of ownership and managerial control is not the basis of the modern corporation
The separation of ownership and managerial control is not the basis of the modern corporation
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The main purpose of a compensation plan is to provide the right incentives
The main purpose of a compensation plan is to provide the right incentives
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Fractional ownership as a measure of incentives is not problematic because firms differ in size and CEOs differ in their wealth
Fractional ownership as a measure of incentives is not problematic because firms differ in size and CEOs differ in their wealth
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Managers' temptations include shirking, hiring friends, consuming excessive perks, and taking excessive or no risks.
Managers' temptations include shirking, hiring friends, consuming excessive perks, and taking excessive or no risks.
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Compensation determination involves estimating company value creation, CEO's attributable efforts, and fair compensation percentage.
Compensation determination involves estimating company value creation, CEO's attributable efforts, and fair compensation percentage.
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Stock grants, including restricted stock and performance shares, aim to align executive and shareholder interests, attract, retain, and motivate employees, and create wealth.
Stock grants, including restricted stock and performance shares, aim to align executive and shareholder interests, attract, retain, and motivate employees, and create wealth.
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Bonus compensation aims to motivate performance but does not align executives with the company's short-term objectives.
Bonus compensation aims to motivate performance but does not align executives with the company's short-term objectives.
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Long-term incentives are only based on achievement of goals over a period exceeding one year.
Long-term incentives are only based on achievement of goals over a period exceeding one year.
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ESG Pay is associated with firms that have publicly issued environmental commitments.
ESG Pay is associated with firms that have publicly issued environmental commitments.
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Various countries have the same regulations and legislation governing executive compensation, influencing compensation strategies.
Various countries have the same regulations and legislation governing executive compensation, influencing compensation strategies.
Signup and view all the answers
The separation of ownership and managerial control is the basis of the modern corporation.
The separation of ownership and managerial control is the basis of the modern corporation.
Signup and view all the answers
Share ownership guidelines require executives to hold a certain number of shares, often defined as a multiple of base salary.
Share ownership guidelines require executives to hold a certain number of shares, often defined as a multiple of base salary.
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Incentives should be positively related to firm performance.
Incentives should be positively related to firm performance.
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The CEO pay ratio requires disclosure of the median total annual compensation of all employees and the ratio of employee median to CEO total compensation.
The CEO pay ratio requires disclosure of the median total annual compensation of all employees and the ratio of employee median to CEO total compensation.
Signup and view all the answers
Firms linking ESG performance to executive compensation receive on average more favorable ESG scores from outside rating agencies.
Firms linking ESG performance to executive compensation receive on average more favorable ESG scores from outside rating agencies.
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Severance multiples for executives have declined over time, as perks represent a diminishing portion of total compensation.
Severance multiples for executives have declined over time, as perks represent a diminishing portion of total compensation.
Signup and view all the answers
Share ownership guidelines require executives to hold a certain number of shares, often defined as a multiple of base salary.
Share ownership guidelines require executives to hold a certain number of shares, often defined as a multiple of base salary.
Signup and view all the answers
Clawback policies give companies the right to recover incentive compensation if performance was based on erroneous information.
Clawback policies give companies the right to recover incentive compensation if performance was based on erroneous information.
Signup and view all the answers
The CEO pay ratio requires disclosure of the median total annual compensation of all employees and the ratio of employee median to CEO total compensation.
The CEO pay ratio requires disclosure of the median total annual compensation of all employees and the ratio of employee median to CEO total compensation.
Signup and view all the answers
Determining executive compensation involves benchmarking and the use of compensation consultants by the compensation committee.
Determining executive compensation involves benchmarking and the use of compensation consultants by the compensation committee.
Signup and view all the answers
In 2018, Nokia complied with the Finnish Corporate Governance Code, except for restricted share plans lacking performance criteria.
In 2018, Nokia complied with the Finnish Corporate Governance Code, except for restricted share plans lacking performance criteria.
Signup and view all the answers
Incentive-based compensation raises concerns about pay-for-performance sensitivity and the potential for excessive risk-taking.
Incentive-based compensation raises concerns about pay-for-performance sensitivity and the potential for excessive risk-taking.
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Theories explaining CEO compensation include rent extraction, competitive pay, managerial power, management talent, technology change, and general managerial skills.
Theories explaining CEO compensation include rent extraction, competitive pay, managerial power, management talent, technology change, and general managerial skills.
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Potential incentive problems with accounting-based and stock option incentives include manipulation of accounting results and excessive risk-taking.
Potential incentive problems with accounting-based and stock option incentives include manipulation of accounting results and excessive risk-taking.
Signup and view all the answers
An international perspective on CEO compensation shows variations in the percentage of fixed and variable pay across different countries.
An international perspective on CEO compensation shows variations in the percentage of fixed and variable pay across different countries.
Signup and view all the answers
Research has shown that executive compensation is influenced by factors such as fractional ownership, managerial talent, and technology change.
Research has shown that executive compensation is influenced by factors such as fractional ownership, managerial talent, and technology change.
Signup and view all the answers
Various countries have different regulations and legislation governing executive compensation, influencing compensation strategies.
Various countries have different regulations and legislation governing executive compensation, influencing compensation strategies.
Signup and view all the answers
ESG Pay is associated with firms that have publicly issued environmental commitments
ESG Pay is associated with firms that have publicly issued environmental commitments
Signup and view all the answers
Fractional ownership as a measure of incentives is problematic because firms differ in size and CEOs differ in their wealth
Fractional ownership as a measure of incentives is problematic because firms differ in size and CEOs differ in their wealth
Signup and view all the answers
Incentives should be positively related to firm performance
Incentives should be positively related to firm performance
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Stock option’s favorable tax treatment for executives is no longer taken into account by IFRS 2 and FAS 123(R)
Stock option’s favorable tax treatment for executives is no longer taken into account by IFRS 2 and FAS 123(R)
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The inclusion of a measure specifically related to emissions in the contract is associated with a decrease in carbon emissions
The inclusion of a measure specifically related to emissions in the contract is associated with a decrease in carbon emissions
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Short-term incentives include base salary and bonus compensation based on performance goals
Short-term incentives include base salary and bonus compensation based on performance goals
Signup and view all the answers
Long-term incentives are only based on achievement of goals over a period exceeding one year
Long-term incentives are only based on achievement of goals over a period exceeding one year
Signup and view all the answers
Stock grants, including restricted stock and performance shares, aim to align executive and shareholder interests, attract, retain, and motivate employees, and create wealth
Stock grants, including restricted stock and performance shares, aim to align executive and shareholder interests, attract, retain, and motivate employees, and create wealth
Signup and view all the answers
Determining executive compensation involves benchmarking and the use of compensation consultants by the compensation committee
Determining executive compensation involves benchmarking and the use of compensation consultants by the compensation committee
Signup and view all the answers
Share ownership guidelines require executives to hold a certain number of shares, often defined as a multiple of base salary
Share ownership guidelines require executives to hold a certain number of shares, often defined as a multiple of base salary
Signup and view all the answers
ESG metrics are more commonly included in compensation contracts in countries where ESG reporting is already mandatory
ESG metrics are more commonly included in compensation contracts in countries where ESG reporting is already mandatory
Signup and view all the answers
The separation of ownership and managerial control is the basis of the modern corporation
The separation of ownership and managerial control is the basis of the modern corporation
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Executive pay is always perfectly aligned with firm performance due to incentive-based compensation
Executive pay is always perfectly aligned with firm performance due to incentive-based compensation
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The separation of ownership and managerial control is the basis of the modern corporation
The separation of ownership and managerial control is the basis of the modern corporation
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Incentive-based compensation completely eliminates potential managerial temptations
Incentive-based compensation completely eliminates potential managerial temptations
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The modern public corporation form leads to efficient specialization of tasks
The modern public corporation form leads to efficient specialization of tasks
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Clawback policies give companies the right to recover incentive compensation if performance was based on erroneous information.
Clawback policies give companies the right to recover incentive compensation if performance was based on erroneous information.
Signup and view all the answers
Determining executive compensation involves benchmarking and the use of compensation consultants by the compensation committee.
Determining executive compensation involves benchmarking and the use of compensation consultants by the compensation committee.
Signup and view all the answers
The CEO pay ratio requires disclosure of the median total annual compensation of all employees and the ratio of employee median to CEO total compensation.
The CEO pay ratio requires disclosure of the median total annual compensation of all employees and the ratio of employee median to CEO total compensation.
Signup and view all the answers
Incentive-based compensation raises concerns about pay-for-performance sensitivity and the potential for excessive risk-taking.
Incentive-based compensation raises concerns about pay-for-performance sensitivity and the potential for excessive risk-taking.
Signup and view all the answers
Theories explaining CEO compensation include rent extraction, competitive pay, managerial power, management talent, technology change, and general managerial skills.
Theories explaining CEO compensation include rent extraction, competitive pay, managerial power, management talent, technology change, and general managerial skills.
Signup and view all the answers
Stock options always lead to increased risk-taking and dilution, and are always tied to the company's financial performance.
Stock options always lead to increased risk-taking and dilution, and are always tied to the company's financial performance.
Signup and view all the answers
Various countries have different regulations and legislation governing executive compensation, influencing compensation strategies.
Various countries have different regulations and legislation governing executive compensation, influencing compensation strategies.
Signup and view all the answers
Research has shown that executive compensation is influenced by factors such as fractional ownership, managerial talent, and technology change.
Research has shown that executive compensation is influenced by factors such as fractional ownership, managerial talent, and technology change.
Signup and view all the answers
Bonus compensation aims to motivate performance but does not align executives with the company's short-term objectives.
Bonus compensation aims to motivate performance but does not align executives with the company's short-term objectives.
Signup and view all the answers
Short-term incentives include base salary and bonus compensation based on performance goals.
Short-term incentives include base salary and bonus compensation based on performance goals.
Signup and view all the answers
Long-term incentives are only based on achievement of goals over a period exceeding one year.
Long-term incentives are only based on achievement of goals over a period exceeding one year.
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An international perspective on CEO compensation shows variations in the percentage of fixed and variable pay across different countries.
An international perspective on CEO compensation shows variations in the percentage of fixed and variable pay across different countries.
Signup and view all the answers
Stock and option incentives are believed to solve agency-problem
Stock and option incentives are believed to solve agency-problem
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Incentives should be positively related to firm performance
Incentives should be positively related to firm performance
Signup and view all the answers
Incentive-based compensation raises concerns about pay-for-performance sensitivity and the potential for excessive risk-taking
Incentive-based compensation raises concerns about pay-for-performance sensitivity and the potential for excessive risk-taking
Signup and view all the answers
ESG Pay is associated with firms that have publicly issued environmental commitments
ESG Pay is associated with firms that have publicly issued environmental commitments
Signup and view all the answers
Fractional ownership as a measure of incentives is problematic because firms differ in size and CEOs differ in their wealth
Fractional ownership as a measure of incentives is problematic because firms differ in size and CEOs differ in their wealth
Signup and view all the answers
Short-term incentives include base salary and bonus compensation based on performance goals
Short-term incentives include base salary and bonus compensation based on performance goals
Signup and view all the answers
Nowadays, IFRS 2 and FAS 123(R) take into account the value of the option at grant date and amortize that value during the life of the option or vesting period
Nowadays, IFRS 2 and FAS 123(R) take into account the value of the option at grant date and amortize that value during the life of the option or vesting period
Signup and view all the answers
The separation of ownership and managerial control is the basis of the modern corporation
The separation of ownership and managerial control is the basis of the modern corporation
Signup and view all the answers
ESG metrics are more commonly included in compensation contracts in countries where ESG reporting is already mandatory
ESG metrics are more commonly included in compensation contracts in countries where ESG reporting is already mandatory
Signup and view all the answers
Stock grants, including restricted stock and performance shares, aim to align executive and shareholder interests, attract, retain, and motivate employees, and create wealth
Stock grants, including restricted stock and performance shares, aim to align executive and shareholder interests, attract, retain, and motivate employees, and create wealth
Signup and view all the answers
Determining executive compensation involves benchmarking and the use of compensation consultants by the compensation committee
Determining executive compensation involves benchmarking and the use of compensation consultants by the compensation committee
Signup and view all the answers
Firms linking ESG performance to executive compensation receive on average more favorable ESG scores from outside rating agencies
Firms linking ESG performance to executive compensation receive on average more favorable ESG scores from outside rating agencies
Signup and view all the answers
Employers are not interested in performance, retention, termination, and post-employment protection.
Employers are not interested in performance, retention, termination, and post-employment protection.
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Long-term incentives are solely based on achievement of goals over a period exceeding one year.
Long-term incentives are solely based on achievement of goals over a period exceeding one year.
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Stock grants, including restricted stock and performance shares, aim to align executive and shareholder interests, attract, retain, and motivate employees, and create wealth.
Stock grants, including restricted stock and performance shares, aim to align executive and shareholder interests, attract, retain, and motivate employees, and create wealth.
Signup and view all the answers
Short-term incentives include bonus compensation, but not base salary.
Short-term incentives include bonus compensation, but not base salary.
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Compensation determination involves estimating company value creation, CEO's attributable efforts, and fair compensation percentage.
Compensation determination involves estimating company value creation, CEO's attributable efforts, and fair compensation percentage.
Signup and view all the answers
Incentive-based compensation does not raise concerns about pay-for-performance sensitivity and the potential for excessive risk-taking.
Incentive-based compensation does not raise concerns about pay-for-performance sensitivity and the potential for excessive risk-taking.
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Stock options always align managers' goals with shareholders' goals.
Stock options always align managers' goals with shareholders' goals.
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ESG metrics are rarely included in compensation contracts in countries where ESG reporting is already mandatory.
ESG metrics are rarely included in compensation contracts in countries where ESG reporting is already mandatory.
Signup and view all the answers
The inclusion of a measure specifically related to emissions in the contract is associated with a decrease in carbon emissions.
The inclusion of a measure specifically related to emissions in the contract is associated with a decrease in carbon emissions.
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Various countries have the same regulations and legislation governing executive compensation, influencing compensation strategies.
Various countries have the same regulations and legislation governing executive compensation, influencing compensation strategies.
Signup and view all the answers
Fractional ownership as a measure of incentives is not problematic because firms differ in size and CEOs differ in their wealth.
Fractional ownership as a measure of incentives is not problematic because firms differ in size and CEOs differ in their wealth.
Signup and view all the answers
The main purpose of a compensation plan is to provide the right incentives.
The main purpose of a compensation plan is to provide the right incentives.
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Study Notes
Executive Compensation and Managerial Temptations
- Employers aim to attract, retain, and motivate employees in line with corporate strategy and risk profile, while aligning their interests with shareholders.
- Employers are interested in performance, retention, termination with minimal financial and legal impact, and post-employment protection.
- Employees are interested in compensation, employment security, and flexible post-employment termination.
- Managerial temptations include putting personal needs before stakeholders' needs, especially if not effectively monitored by shareholders and the board.
- Self-serving managerial actions include shirking, hiring friends, consuming excessive perks, and taking excessive or no risks.
- Compensation determination involves estimating company value creation, CEO's attributable efforts, and fair compensation percentage.
- Compensation levels are practically determined through benchmarking and input from remuneration committees and compensation consultants.
- Short-term incentives include base salary, which provides security and predictable income, and bonus compensation based on performance goals.
- Bonus compensation aims to motivate performance and align executives with the company's short-term objectives, with common measures such as earnings, revenue, and cash flow.
- Long-term incentives are based on achievement of goals over a period exceeding one year and may be based on stock price or business performance.
- Stock grants, including restricted stock and performance shares, aim to align executive and shareholder interests, attract, retain, and motivate employees, and create wealth.
- Stock options align managers' goals with shareholders' goals, but can lead to increased risk-taking and dilution, and are not always tied to the company's financial performance. Other compensations include perquisites, retirement compensation, and severance pay.
Executive Compensation and Corporate Governance
- Severance multiples for executives have declined over time, as perks represent a diminishing portion of total compensation.
- Share ownership guidelines require executives to hold a certain number of shares, often defined as a multiple of base salary.
- Clawback policies give companies the right to recover incentive compensation if performance was based on erroneous information.
- The CEO pay ratio requires disclosure of the median total annual compensation of all employees and the ratio of employee median to CEO total compensation.
- Determining executive compensation involves benchmarking and the use of compensation consultants by the compensation committee.
- In 2018, Nokia complied with the Finnish Corporate Governance Code, except for restricted share plans lacking performance criteria.
- Various countries have different regulations and legislation governing executive compensation, influencing compensation strategies.
- Incentive-based compensation raises concerns about pay-for-performance sensitivity and the potential for excessive risk-taking.
- Theories explaining CEO compensation include rent extraction, competitive pay, managerial power, management talent, technology change, and general managerial skills.
- Potential incentive problems with accounting-based and stock option incentives include manipulation of accounting results and excessive risk-taking.
- An international perspective on CEO compensation shows variations in the percentage of fixed and variable pay across different countries.
- Research has shown that executive compensation is influenced by factors such as fractional ownership, managerial talent, and technology change.
Executive Compensation and Managerial Temptations
- Employers aim to attract, retain, and motivate employees in line with corporate strategy and risk profile, while aligning their interests with shareholders.
- Employers are interested in performance, retention, termination with minimal financial and legal impact, and post-employment protection.
- Employees are interested in compensation, employment security, and flexible post-employment termination.
- Managerial temptations include putting personal needs before stakeholders' needs, especially if not effectively monitored by shareholders and the board.
- Self-serving managerial actions include shirking, hiring friends, consuming excessive perks, and taking excessive or no risks.
- Compensation determination involves estimating company value creation, CEO's attributable efforts, and fair compensation percentage.
- Compensation levels are practically determined through benchmarking and input from remuneration committees and compensation consultants.
- Short-term incentives include base salary, which provides security and predictable income, and bonus compensation based on performance goals.
- Bonus compensation aims to motivate performance and align executives with the company's short-term objectives, with common measures such as earnings, revenue, and cash flow.
- Long-term incentives are based on achievement of goals over a period exceeding one year and may be based on stock price or business performance.
- Stock grants, including restricted stock and performance shares, aim to align executive and shareholder interests, attract, retain, and motivate employees, and create wealth.
- Stock options align managers' goals with shareholders' goals, but can lead to increased risk-taking and dilution, and are not always tied to the company's financial performance. Other compensations include perquisites, retirement compensation, and severance pay.
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Description
Test your knowledge of executive compensation and managerial temptations with this quiz. Explore topics such as performance-based incentives, stock grants, and the alignment of executive and shareholder interests. Gain insights into the complexities of compensation determination and the potential pitfalls of self-serving managerial actions.
