Term Test 2

Question 1

What percentage of CEO turnover events are forced

Answer 1

35%

Question 1

Global CEO turnover rate

Answer 1

17%

Question 2

Cost of C-Suite succession mistakes

Answer 2

1.8 billion

Question 3

Supply side - Successful CEO candidate characteristics

Answer 3

• Humble
• Feedback seeking
• Unselfish

Question 4

What caused the shortage of executive talent?

Answer 4

Downsizing of middle management and organization flattening

Question 5

Succession Planning

Answer 5

An effort to protect the organization’s ability to operate during a leadership transition

Question 6

Benefits of succession planning

Answer 6

1. Reduce costs
2. Reduce anxiety
3. Prepare for CEO retirement
4. Prepare for crises

Question 7

Models for CEO succession planning

Answer 7

1. External candidate
2. President and/or COO (heir apparent)
3. Horse race
4. Inside-outside model

Question 8

External candidate model for CEO succession planning

Answer 8

Company recruits an external candidate. Associated with companies with weak performance

Question 9

What percentage of successions involve an internal replacement?

Answer 9

70-80%, common in companies with strong performance

Question 10

External CEO pros

Answer 10

• Tends to have proven CEO experience
• More free to make changes

Question 11

External CEO cons

Answer 11

• Less familiar with company
• Operations disruption
• Board has not evaluated performance firsthand
• Leadership style may not translate

Question 12

Heir Apparent

Answer 12

Company promotes a leading candidate to position of president and/or COO

Question 13

Heir apparent pros

Answer 13

• Board observes performance
• Familiar with company
• Continuity
• Smooth transition

Question 14

Heir apparent cons

Answer 14

• Adds complexity to organization
• Responsibilities need to be defined and differentiated from CEO
• Risk becoming lifetime COO
• No significant change

Question 15

Horse race

Answer 15

Company promotes two or more internal candidates to high-level positions who compete for CEO

Question 16

Horse race pros

Answer 16

• Board observes performance
• Board does not commit to a candidate
• Executives develop desired skills

Question 17

Horse race cons

Answer 17

• Public
• Creates internal factions
• Creates a loss of talent when losers resign

Question 18

Inside-outside model

Answer 18

Company develops internal talent and evaluates external talent

Question 19

Inside-outside pros

Answer 19

• Internal candidates gain new skills
• Assures board that best candidate is selected

Question 20

Inside-outside cons

Answer 20

• Requires lots of planning
• Can cause erosion in trust

Question 21

Executive compensation

Answer 21

Mechanism that aligns the interests of managers and owners through incentives

Question 22

Goal of compensation

Answer 22

• Attract and retain talent
• Motivate executive

Question 23

What is the largest determinant of CEO pay?

Answer 23

Company size

Question 24

Optimal contracting

Answer 24

CEO pay is awarded through market forces

Question 25

Rent extraction

Answer 25

CEO pay levels are a result of market failure and has allowed for compensation over what should be awarded

Question 26

Who might set executive compensation?

Answer 26

- Compensation consultants - Compensation committees - Board of directors - Shareholders

Question 27

What is the right amount of compensation?

Answer 27

Minimum amount it takes to attract and retain a qualified individual

Question 28

Why is CEO pay higher among companies with compensation consultants?

Answer 28

Due to issues with governance quality

Question 29

Ratcheting

Answer 29

Median compensation increases due to benchmarking pay against peer groups

Question 30

Conclusions about peer groups and CEO pay

Answer 30

- Peer groups set competitive pay - Peer groups are selected to inflate pay

Question 31

Deferred compensation

Answer 31

- Stock options - Stock plans - Stock appreciation rights

Question 32

Components of current core compensation

Answer 32

- Annual base pay - Bonuses

Question 33

Annual base pay

Answer 33

Fixed element of annual cash compensation

Question 34

Bonuses

Answer 34

- Discretionary - Performance contingent - Predetermined allocation - Target plan

Question 35

Stock options

Answer 35

Stocks purchased at a designated price for a specific time

Question 36

Stock grants

Answer 36

Company offers stock to employees

Question 37

Exercise of stock grants

Answer 37

Purchase of stock

Question 38

Disposition

Answer 38

Sale of stock

Question 39

Fair market value

Answer 39

Average stock price on TSX

Question 40

Severance

Answer 40

Payment given if the CEO is removed for reasons other than what is stipulated in their contract

Question 41

Golden Parachutes

Answer 41

Provide executives pay and benefit following termination due to ownership change or takeover

Question 42

Platinum parachutes

Answer 42

Compensation for departing executives. Awarded to avoid legal battles or critical press reports

Question 43

Clawback provisions

Answer 43

Allow board to take back performance-based compensation when goals were not reached

Question 44

Compensation risk

Answer 44

Compensation plans designed to get the most motivation for a given amount of risk

Question 45

Theory of executive ownership

Answer 45

Holding equity should create incentive to build economic value because they have "skin in the game"

Question 46

Target ownership plan

Answer 46

Require an executive to hold a minimum amount of stock

Question 47

What do direct stock holdings do with risk?

Answer 47

Motivates executives to grow and protect value

Question 48

What do stock option grants do with risk?

Answer 48

Motivates executives to increase firm risk

Question 49

True or false: Executives facing convex payoff curves engage in more risk taking?

Answer 49

True

Question 50

Hedging

Answer 50

Executives might hedge the value for equity holdings rather than selling

Question 51

Hedging pros

Answer 51

- Diversification - Tax advantages - Minimizes scrutiny

Question 52

Hedging cons

Answer 52

- Unwinds equity incentives to perform - More costly - Difficult to explain

Question 53

True or false: Executives use hedges to opportunistically time trades.

Answer 53

False

Question 54

Pledging

Answer 54

Pledging shares as collateral

Question 55

What is an insider?

Answer 55

Individual who has access to material information that is not available to the public

Question 56

Blackout window

Answer 56

Period in which material information is not released to the public and insiders are restricted from trading

Question 57

Price sensitive infomration

Answer 57

Information which will affect the price of securities of a company