Exam Questions

Question 1

An award that has the purpose of recognizing any singularly notable achievement that contributes to the successful conduct of a business is known as a(n):

1. Executive succession award
2. Special accomplishment award
3. Retention award
4. Transaction award
5. Leave bonus

Answer 1

B is the correct answer. The special accomplishment award has as its purpose recognizing any singularly notable achievement that contributes to the successful conduct of a business. Options A, C, D and E are other awards that do not t the de nition given in the question. See page 441 of the text.

Question 2

which of the following statements regarding organizational structure change is (are) correct?

• A merger is the joining together of two companies to form a new organization.
• A joint venture is a formal agreement between two companies on respective responsibility without forming a new company.
• in a spin-off, the divested business is sold to existing shareholders.

1. I only
2. II only
3. III only
4. I and III only
5. I, II and III

Answer 2

A is the correct answer. Statements II and III contain erroneous descriptions of joint ventures and spin-offs. See pages 29-32 of the text.

Question 3

All the following are disadvantages of deferred compensation arrangements excePt:

1. An unfunded plan makes the executive a general creditor of the company and therefore the executive risks nonpayment of promised bene ts.
2. The Sarbanes-Oxley Act prohibits the trading of company stock by directors and executive of cers during the blackout period of company bene t plans.
3. The deferred compensation plan, especially if funded, may come under the de nition of a security as de ned by the Securities Act of 1933 and could require registration with the Securities and Exchange Commission.
4. Executives may demand additional compensation.
5. A nonquali ed plan is generally subject to the Employee Retirement Income Security Act (ERISA) funding requirements.

Answer 3

e is the correct answer. A, B, C and D are disadvantages listed on pages 103-107 of the text. E is incorrect because nonquali ed plans are not subject to ERISA funding requirements. See page 102 of the text.

Question 4

Which of the following statements regarding the market pricing method of job evaluation is (are) correct?

• in this method the labor market is used as the basis for evaluating jobs.
• Jobs for which no survey data exist are evaluated by using the ranking method.
• After the initial structuring, this method requires a maximum number of extensive surveys.

1. I only
2. II only
3. III only
4. I and II only
5. I, II and III

Answer 4

D is the correct answer. After the initial structuring, the need for extensive surveys is minimized, not maximized. See pages 201-202 of the text.

Question 5

A stock purchase with a 100% discount is called a:

1. Stock award
2. Stock option
3. Letter stock
4. Performance share
5. Qualifying disposition

Answer 5

A is the correct answer. A stock purchase with a 100% discount is a stock award. Options B, C, D and E are all incorrect. See page 523 of the text.

Question 6

Which of the following is (are) typical permissible payment event (s) under section 409A?

• separation from service
• disability
• unforeseeable emergency

1. I only
2. II only
3. III only
4. I and II only
5. I, II and III

Answer 6

e is the correct answer. Options I, II and III are Section 409A permissible events allowing distributions from a nonquali ed deferred compensation plan. See page 99 of the text.

Question 7

Which of the following is (are) among the reasons for a company to consider repricing its stock options?

• the company wants to ensure that the integrity of its stock option plans is maintained.
• the company wants to satisfy shareholder expectations.
• the company wants to encourage a selected group of executives to resign.

1. None
2. I only
3. II only
4. III only
5. I and II only

Answer 7

A is the correct answer. A company considers repricing its stock options in response to stock price declines. The action can undermine the integrity of a company’s stock option plan, and often it also upsets shareholders. Without the repricing, the company faces the possibility of both talented and untalented employees resigning. See page 8.41 of the Learning Guide.

Question 8

All the following are attractive situations in which restricted stock awards may be given to company executives excePt:

1. A form of golden handcuffs to retain key talent
2. A front-end bonus to hire a top executive without distorting the compensation program
3. When the executive wishes to assign, transfer and sell the stock without a tax liability
4. A company in the mature phase with reduced opportunities for growth in market value of company stock
5. A privately held company interested in tying payment to book value in order to avoid the market swings of publicly traded stock

Answer 8

c is the correct answer. Options A, B, D and E all re ect attractive situations in which restricted stock awards may be given to executives. Option C does not re ect one of these situations. See pages 523-524 of the text.

Question 9

Which of the following statements about vesting is (are) correct?

• An individual may not be eligible for retirement but yet earn the right to receive retirement bene ts (become vested).
• for employer matching contributions, the maximum amount of time a quali ed plan, using cliff vesting, can make participants wait until they become fully vested is eight years.
• for employer matching contributions, the maximum amount of time a quali ed plan, using a graduated schedule, can make participants wait until they become fully vested is ten years.

1. None
2. I only
3. II only
4. I and III only
5. II and III only

Answer 9

B is the correct answer. Statement I is correct. Statements II and III are not correct. For cliff vesting, individuals must be vested after three years of service. See page 343 of the text.

Question 10

Long-term incentive plans that do not permit the recipient to own publicly traded or privately held stock are called:

1. Evergreen plans
2. Tracking plans
3. Phantom plans
4. Performance plans
5. Flipping plans

Answer 10

c is the correct answer. Phantom stock plans do not use company stock. For this reason, such plans may also be called shadow or pretend stock plans. See page 557 of the text.

Question 11

All the following are disadvantages of making salary adjustments at the anniversary of employment rather than at a common time of the year exCept:

1. The demands on management time are greater since the manager must come up to speed on each situation.
2. Budgetary game playing is made possible.
3. It is more dif cult to respond equitably to rapidly changing economic conditions.
4. Management is less able to personalize the decision and communicate adjustments.
5. It is more dif cult to ensure equitable pay treatment throughout the organization.

Answer 11

D is the correct answer. Options A through C and Option E are all disadvantages of distributed adjustments in terms of the timing of a salary action. See pages 237-238 of the text.

Question 12

All the following are parts of an ideal compensation plan exCept:

1. It identi es with the shareholder.
2. It is easily understood by all.
3. It requires special target setting.
4. It has no earnings charge.
5. It is tax-deductible to the company.

Answer 12

C is the correct answer. Options A, B, D and E are all elements of an ideal compensation plan. Option C is not an element of an ideal compensation plan. See pages 588-589 of the text.

Question 13

Which of the following statements about stock appreciation rights is (are) correct?

• the stock appreciation right is a feature many companies use in conjunction with a nonstatutory option.
• stock appreciation rights are most attractive in times of low-interest rates and high stock price appreciation.
• stock appreciation rights became more popular when FAs 123r put them and stock options on equal terms for a charge to the earnings statement.

1. I only
2. II only
3. III only
4. I and III only
5. I, II and III

Answer 13

D is the correct answer. Options I and III are correct statements regarding stock appreciation rights. Option II states that stock appreciation rights are most attractive in times of low- interest rates and high stock price appreciation. This statement is not correct. Stock appreciation rights are most attractive in times of high-interest rates and low stock price appreciation. See pages 509 and 512 of the text.

Question 14

A contract that pays bene ts to an executive but requires both a change in company control and termination of the executive following a change in company control can be called a(n):

Assignment policy

Walkaway contract

Double trigger contract

Irrevocable trust

Claw-back clause

Answer 14

1. C is the correct answer. Unlike a single trigger contract that typically permits a covered executive to leave voluntarily within 30 days following a change in control, a double trigger contract requires both a change in control and termination, either involuntary or constructive. See page 269 of the text.

Question 15

Long-term incentives typically set which of the following types of objectives:

• threshold objective
• target objective
• maximum objective

1. I only
2. II only
3. III only
4. I and II only
5. I, II and III

Answer 15

e is the correct answer. Long-term incentives typically set a threshold, target and maximum objective. See page 541 of the text.

Question 16

Which of the following statements about split dollar life insurance is (are) correct?

• in a split dollar insurance plan, the executive’s bene ciary receives the full face value of the policy if the insured dies while insured under the plan.
• under the endorsement method, the employer owns the policy and the division of proceeds and premiums is provided for in an endorsement to the contract.
• the sarbanes-oxley Act has had an important impact on split dollar plans.

1. I only
2. II only
3. III only
4. II and III only
5. I, II and III

Answer 16

d is the correct answer. Statements II and III are correct regarding split dollar insurance. Statement I is incorrect because the bene ciary receives the face value minus the premiums paid by the employer. See pages 316-319 of the text.

Question 17

to determine life insurance coverage exCept:

1. This approach estimates expenses rather than income.
2. The ages of the survivors are critical in this approach.
3. Expenses can essentially be separated into stable and declining needs categories.
4. The longer the executive lives, the greater the amount of insurance that is needed.
5. In order of priority, settlement expenses need to be paid rst to cover the deceased’s expenses.

Answer 17

d is the correct answer. Options A through C and E are correct regarding survivor needs. Option D is incorrect regarding survivor needs because the longer the executive lives and provides the needed income, the less is needed in amount of insurance. See pages 325-326 of the text.

Question 18

All of the following are advantages of short-term incentive plans for executives except:

1. They provide an opportunity to increase pay by increasing performance.
2. If paid in cash, they make available suf cient money to pay income taxes.
3. Certain plan designs offer an opportunity to participate in stock appreciation.
4. Income is taxed at ordinary rates at time of receipt.
5. They may eliminate subjectivity in bonus determination.

Answer 18

D is the correct answer. Options A, B, C and E are all advantages to the executive. Option D is a disadvantage. See pages 443-444 of the text.

Question 19

A managed care organization that provides covered employees with a list of doctors and hospitals the person may use and where each patient is assigned a primary care physician who controls access to specialists is called a:

1. Health maintenance organization
2. Preferred provider organization
3. Point-of-service plan
4. Fee for service plan
5. Wellness program

Answer 19

A is the correct answer. The de nition given describes a health maintenance organization. The other choices, B through E, re ect other types of managed care. See pages 300-301 of the text.

Question 20

Which of the following statements about possible disadvantages of incentive pay is (are) correct?

• incentives discourage teamwork and cooperation.
• incentives punish those who do not meet their objectives.
• incentives do not make high performers work harder.

1. I only
2. II only
3. III only
4. I and II only
5. I, II and III

Answer 20

. e is the correct answer. Statements I, II and III are all possible disadvantages of incentive pay. See page 588 of the text.

Question 21

All the following concepts concerning long-term incentives are correct except:

1. They are considered to have a performance period greater than one year.
2. Long-term incentives are rare or nonexistent in not-for-pro t companies.
3. Plans use either a form of stock and/or cash.
4. Most payouts are subject to an immediate capital gains tax.
5. These incentives typically require some form of discounting to give them a present value.

Answer 21

D is the correct answer. Options A, B, C and E are all correct concepts regarding long-term incentives. See page 450 of the text.

Question 22

the job evaluation approach which is nonquantitative in nature and arrays jobs in order of importance is called the:

1. Classi cation method
2. Point factor method
3. Maturity method
4. Market pricing method
5. Ranking method

Answer 22

e is the correct answer. Ranking is a nonquantitative method of arraying jobs in order of importance. Choices A through D are other types of job evaluation, but they do not give the correct de nition of ranking. See page 194 of the text.

Question 23

All the following are used as elements of compensation for executives except:

1. Employee bene t plans
2. Perquisites
3. Short-term incentives
4. Straight piecework plans
5. Long-term incentives

Answer 23

D is the correct answer. Options A, B, C and E all re ect a component of executive total compensation. Option D is an individual incentive plan for production employees and not a component of executive compensation. See pages 5-8 of the text.

Question 24

Which of the following methods is (are) utilized in analyzing bene t costs as a percentage of pay?

• total cost for all bene ts divided by gross pay
• total cost for all bene ts divided by base pay for time actually worked
• bene ts cost excluding time off with pay divided by gross pay

1. I only
2. II only
3. III only
4. I and III only
5. I, II and III

Answer 24

e is the correct answer. Bene t costs are analyzed using all three of the approaches indicated by options I through III. See pages 253-254 of the text.

Question 25

the rst stage in the strategic-planning process is developing the:

1. Mission
2. Core competencies
3. Objectives
4. Issues
5. Vision

Answer 25

e is the correct answer. Options A through D are phases of the strategic-planning process, but they are not the initial step in the process. See page 34 of the text.

Question 26

the middle value of data after it has been arrayed low to high in value is called:

1. The mean
2. The median
3. The mode
4. A standard deviation
5. The range

Answer 26

B is the correct answer. The median is the middle value of the data after it has been arrayed low to high in value. None of the other choices is the correct de nition of the median. See page 80 of the text.

Question 27

the period speci ed in a stock option that speci es a beginning date, typically the date of the grant and a date when stock is rst eligible for purchase, is called the:

1. Optionee eligibility
2. Frequency of grant
3. Multiyear grant period
4. Waiting period
5. Annual grant period

Answer 27

D is the correct answer. The waiting period is the time between the beginning date and the date on which stock is rst eligible for purchase. See page 465 of the text.

Question 28

the importance of a short-term incentive plan relative to other pay elements for a for-pro t privately-held company in the growth market stage is typically:

A. Neutral

B. Low
C. Moderate

D. High

E. Undeterminable

Answer 28

D is the correct answer. Privately-held companies have a high emphasis on short-term incentives in the growth market stage because of their inherent limits on long-term incentives (namely, no publicly traded stock). See page 581 of the text.

Question 29

Which of the following approaches is (are) used by planners in setting goals for an organization?

• the historical (look-back) approach
• the business plan (look-forward) approach
• the peer comparison (look-around) approach

1. I only
2. II only
3. III only
4. I and II only
5. I, II and III

Answer 29

e is the correct answer. All the approaches given are used by planners to set goals for the organization. See pages 398-402 of the text.

Question 30

the type of retirement plan which speci es the amount of annuity that the employee will receive after reaching a certain age and/or service requirements is called a(n):

1. De ned bene t plan
2. De ned contribution plan
3. Employee stock ownership plan
4. Pro t-sharing plan
5. Employee stock purchase plan

Answer 30

A is the correct answer. The plan described in the stem is a de ned bene t plan, Option A. See pages 344-345 of the text.

Question 31

Which of the following is (are) characteristics of the board of directors of an organization?

• the number of directors is typically about 12.
• most members of the board of directors are inside directors.
• the most important quali cation to be a member of a board of directors is to be an academician.

1. I only
2. II only
3. III only
4. I and III only
5. I, II and III

Answer 31

A is the correct answer. The number of members of a board of directors is typically about 12. Statement II is incorrect because most members of a board of directors are outside directors. Statement III is incorrect because the most common characteristic of a member of a board of directors is being or having been a CEO, not an academician. See pages 647 and 651 of the text.

Question 32

All the following are principles recently set forth by the national Association of corporate directors for setting director pay except:

1. Director compensation should be determined by the board and disclosed completely to shareholders.
2. Director compensation should be aligned with the long-term interests of shareholders.
3. Compensation should be used to motivate director behavior.
4. Director compensation should be heavily tilted toward cash and less toward equity.
5. Director compensation should be approached on an overall basis rather than as an array of separate elements.

Answer 32

d is the correct answer. One of the best practices listed by the National Association of Corporate Directors is to “pay directors solely in the form of equity and cash—with equity representing 50 to 100 percent of the total.” See page 694 of the text.

Question 33

All the following are advantages for the offset integration method exCept:

1. The offset can be designed to adjust automatically to increasing Social Security bene ts.
2. This type of integration can provide a company with some protection against spiraling bene ts and cost.
3. This method is deemed to be less logical than the excess method.
4. This type of integration provides a more direct approach to achieving bene t objectives than the excess integration method.
5. The offset approach meshes logically with bene t formulas based on earnings close to retirement.

Answer 33

C is the correct answer. Options A, B, D and E are correct. The offset approach is believed to be the more logical one. See pages 350-351 of the text.

Question 34

the committee of the board of directors which typically proposes to the board candidates for election as of cers and/or directors, reviews performance of directors and proposes the director pay policy is the:

1. Audit committee
2. Governance committee
3. Shareholders committee
4. Pension committee
5. Strategic planning committee

Answer 34

B is the correct answer. The governance committee of a board of directors performs the duties described in the question. See page 652 of the text.

Question 35

All the following are included in a formal stock plan excePt:

1. A statement of the formal plan’s purpose
2. A statement of who is eligible to participate
3. A statement of the maximum number of shares that are available for use
4. A statement about the use of shares of phantom stock
5. A statement about what will happen should the number of shares outstanding change as the result of recapitalization

Answer 35

D is the correct answer. Options A, B, C and E are all part of a formal stock plan. Option D, shares of phantom stock, is not part of a formal plan. See pages 547-549 of the text.

Question 36

financial planning for executives would involve all of the following actions exCept:

1. Gathering personal information
2. Establishing priorities and time lines
3. Making asset allocation decisions
4. Evading taxes
5. Estate planning

Answer 36

d is the correct answer. All of these activities would occur in nancial planning for an executive except evading taxes. The text distinguishes between tax avoidance and tax evasion. The former involves taking full advantage of tax law to minimize the payment of taxes. Tax evasion involves using illegal means to minimize the payment of taxes. Most often tax evasion occurs by understating income and/or overstating deductible expenses. See pages 278-279 of the text.