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MGST 451 > Term Test 2 > Flashcards

Term Test 2 Flashcards

Chapters 7-9

1
Q

What percentage of CEO turnover events are forced

A

35%

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1
Q

Global CEO turnover rate

A

17%

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2
Q

Cost of C-Suite succession mistakes

A

1.8 billion

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3
Q

Supply side - Successful CEO candidate characteristics

A
  • Humble
  • Feedback seeking
  • Unselfish
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4
Q

What caused the shortage of executive talent?

A

Downsizing of middle management and organization flattening

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5
Q

Succession Planning

A

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

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6
Q

Benefits of succession planning

A
  1. Reduce costs
  2. Reduce anxiety
  3. Prepare for CEO retirement
  4. Prepare for crises
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7
Q

Models for CEO succession planning

A
  1. External candidate
  2. President and/or COO (heir apparent)
  3. Horse race
  4. Inside-outside model
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8
Q

External candidate model for CEO succession planning

A

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

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9
Q

What percentage of successions involve an internal replacement?

A

70-80%, common in companies with strong performance

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10
Q

External CEO pros

A
  • Tends to have proven CEO experience
  • More free to make changes
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11
Q

External CEO cons

A
  • Less familiar with company
  • Operations disruption
  • Board has not evaluated performance firsthand
  • Leadership style may not translate
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12
Q

Heir Apparent

A

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

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13
Q

Heir apparent pros

A
  • Board observes performance
  • Familiar with company
  • Continuity
  • Smooth transition
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14
Q

Heir apparent cons

A
  • Adds complexity to organization
  • Responsibilities need to be defined and differentiated from CEO
  • Risk becoming lifetime COO
  • No significant change
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15
Q

Horse race

A

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

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16
Q

Horse race pros

A
  • Board observes performance
  • Board does not commit to a candidate
  • Executives develop desired skills
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17
Q

Horse race cons

A
  • Public
  • Creates internal factions
  • Creates a loss of talent when losers resign
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18
Q

Inside-outside model

A

Company develops internal talent and evaluates external talent

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19
Q

Inside-outside pros

A
  • Internal candidates gain new skills
  • Assures board that best candidate is selected
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20
Q

Inside-outside cons

A
  • Requires lots of planning
  • Can cause erosion in trust
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21
Q

Executive compensation

A

Mechanism that aligns the interests of managers and owners through incentives

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22
Q

Goal of compensation

A
  • Attract and retain talent
  • Motivate executive
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23
Q

What is the largest determinant of CEO pay?

A

Company size

24
Q

Optimal contracting

A

CEO pay is awarded through market forces

25
Q

Rent extraction

A

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

26
Q

Who might set executive compensation?

A
  • Compensation consultants
  • Compensation committees
  • Board of directors
  • Shareholders
27
Q

What is the right amount of compensation?

A

Minimum amount it takes to attract and retain a qualified individual

28
Q

Why is CEO pay higher among companies with compensation consultants?

A

Due to issues with governance quality

29
Q

Ratcheting

A

Median compensation increases due to benchmarking pay against peer groups

30
Q

Conclusions about peer groups and CEO pay

A
  • Peer groups set competitive pay
  • Peer groups are selected to inflate pay
31
Q

Deferred compensation

A
  • Stock options
  • Stock plans
  • Stock appreciation rights
32
Q

Components of current core compensation

A
  • Annual base pay
  • Bonuses
33
Q

Annual base pay

A

Fixed element of annual cash compensation

34
Q

Bonuses

A
  • Discretionary
  • Performance contingent
  • Predetermined allocation
  • Target plan
35
Q

Stock options

A

Stocks purchased at a designated price for a specific time

36
Q

Stock grants

A

Company offers stock to employees

37
Q

Exercise of stock grants

A

Purchase of stock

38
Q

Disposition

A

Sale of stock

39
Q

Fair market value

A

Average stock price on TSX

40
Q

Severance

A

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

41
Q

Golden Parachutes

A

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

42
Q

Platinum parachutes

A

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

43
Q

Clawback provisions

A

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

44
Q

Compensation risk

A

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

45
Q

Theory of executive ownership

A

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

46
Q

Target ownership plan

A

Require an executive to hold a minimum amount of stock

47
Q

What do direct stock holdings do with risk?

A

Motivates executives to grow and protect value

48
Q

What do stock option grants do with risk?

A

Motivates executives to increase firm risk

49
Q

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

A

True

50
Q

Hedging

A

Executives might hedge the value for equity holdings rather than selling

51
Q

Hedging pros

A
  • Diversification
  • Tax advantages
  • Minimizes scrutiny
52
Q

Hedging cons

A
  • Unwinds equity incentives to perform
  • More costly
  • Difficult to explain
53
Q

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

A

False

54
Q

Pledging

A

Pledging shares as collateral

55
Q

What is an insider?

A

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

56
Q

Blackout window

A

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

57
Q

Price sensitive infomration

A

Information which will affect the price of securities of a company

58
Q
A

MGST 451 (2 decks)

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