Short review Q2 Flashcards
why is it so hard to find a new ceo
- small labour pool for difficult position
- difficult/demanding high stakes position
- hard to evaluate skills through an internview
CEO have higher what compared to the average population
cognitive, non-cognitive and emotional and psychological stability
have internal candidates ever been ceo before?
no
have external possibly been ceos
yes
pros of an internal ceo
- known leadership style, culture and corporate fit
- less expensive
- great in times of stability
- can groom/train for the specific position by addressing weaknesses
- quicker onboarding
- shows contiuity and stability
internal ceo tend to ____-perform external ceo
out
cons of internal ceo
- no previous ceo experience
- need to commit to the plan long in advance
- more of the same thing
what is heir apparent and list 2 negatives
candidate promoted to position of COO or president
- responsibilities but be clearly differentiated from ceo
- can be stuck in the position for too long
what is the horse race and give 4 features of it
company promotes 2 or more candidates and lets them fight it out for the position
- no advance commitment to a candidate
- hiring is ublic
- different factions who support different candidates form
- losers will resign and company will suffer a brain drain
when was an external ceo traditionally hired and what is going on now
was traditionally hired in time of underperofrmance, now hired even in good perfromance
list 3 pros of an external hire
- best when company needs a diretion and strategic change
- might have previous ceo experince
- no previous work baggage to bring
list 3 cons of an external hire
- very expensive
- high risk of poor fit
- longer onboarding and getting acquanted with new copmpany
why is succession planning important
- reduces hiring costs
- reduces anxiety
- prepared for crisis
- shows tranparency in planning
how is succession planning done
ongoing procces of having internal and external candidates
who is responsible for finding new ceo
nominating nd compensating committee
why fire a ceo
- failed m&a
- poor perfromance
- misconduct
why might a ceo perfrom bad and not be fired
- small candidate pool
- very expensive
- comapny not prepared with succession plant
- committe/boad dont care
- planned retirement soon
what is the purpose of compensation
- attract
- maintain
- motivate
why are some board memebers not sufficiently effective at setting compensation
- lack of independance
- not engaged
- lack of power relative to ceo
what is included in a compensation package and is it st or lt
salary s-t
bonus s-t
equity in company l-t
- stock options
- restricted stock
- perquisites
what are the categories of bonus
- giaranteed bonus
- min/max amounts
- based on financial or non-fin amounts
- discretionary
what are stock options
right to buy shares in the future at a fixed rate. price is usually what is is on grant date
stock options v_____ and e______
vest and expire
what is vesting
whne the stock is “earned” over time
what is optimal contracting
Efficient process of pay competition and market foces. Efficient negotiation between
Principal and candidates for CEO. Value that CEO creates is shared equitably among
shareholders, stakeholders and CEO
what is rent extraction
Choosing CEO compensation is not an efficient process. It is a market failure to be efficient
and CEOs extort influence on Board of Directors
what are the three steps in deciding on compensation
- comp. committee designs structure of compensation with amounts from BoD, and consults HR and Finance
- package is voted on and approved by INDEPENDENT directors
- shareholders must then approve salary and equity based comp. based on “say on pay”
what is the target ownership plan
plan that dictates that a CEO must have a set amount of their salary as equity in the company
what are three positives of the target ownershipp plan
- incluences risk taking
- aligns interest
- reduces agency costs `
in what ways is an inclination in risk taking acted upon (4 wayss)
- increase spenidign on R&D
- reduce diversification
- more leverage
- spend on expansions
How can management act negatively in increased risk taking
- can manipulate accounting records
how can manipulation of accounting happen
- inflate earings to achieve bonus
- manipulate timing of grants
- manipulate timing of sensitive info being released
maniulation in accounting increases a_______ c_____
agency costs
what is used to mitigate accouting maniulation
clawback provisions
hedging allows for diversification without
immediate selling of your equity
what causes the want for hedging
concentrated positions in the company such as your portfolio having a high % of the stock, which makes you want to diversify
what are the positives of hedging
- might be tax advatageous
- minimizes public outlash that would happen if selling
what are negatives of hedging
- lowers inscentive to perform
- giving too many S/O creates the opportunity for a CEO to be risk averse and hedge his position
it is ______ to short sell
illegal
it is _______ to buy puts
legal
do all coampnies allow hedigng
no
what is pledging
essentially using your equity in the company as collateral for a loan
what are the posistives of pledging
- lower interest rates
- can diversify while holding position in comapny
- tax advantageous
what are hte negatives of pledging
- chages inscentive structur
pledging transactions deserve _________ considerations
special
what is the difference between CEO and regualr e ployees when it comes to pledging
often ceo not allowed to pledge but employees can
is the tipper punishable in an insider trade even if they dont trade
yes
what is the blackout trading window
certain period, usually 50 days, where certain empoyees are not allowed to buy or sell any shares. this is done before earnings, product, acqusition annoucenemnts
