chapter 13 Bus100

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executive compensation

The compensation (total pay) of corporate executives, including salary, bonus, stock options, and various benefits.

An argument in support of high executive compensation is: -There is currently a surplus of qualified executive candidates. -High executive pay drives away talented middle managers who feel unfairly compensated. -High salaries provide an incentive for innovation and risk-taking. -Inflated executive pay helps U.S. firms compete with foreign rivals.

High salaries provide an incentive for innovation and risk-taking. :

Which of the following is a key feature of effective boards of directors? -Combine the duties of the board chairman and the chief executive. -Ensure that no outside members are included on the board. -Hold regular meetings without the CEO present. -Fill all important positions on the board with managers with insider knowledge of the firm.

Hold regular meetings without the CEO present.

Why are pay-for-performance stock option grants an incentive to improve company results? -High executive compensation attracts talent from competitors and suppliers. -It actually becomes a disincentive because the stakes are too high to manage. -If the company stock price increases, the executive compensation also rises. -It allows executive compensation to be better aligned with other developed nations.

If the company stock price increases, the executive compensation also rises.

private equity firms

Organizations that manage pools of money invested by very wealthy individuals and institutions.

institutional investor

A financial institution, pension fund, mutual fund, insurance company, university endowment, or similar organization that invests its accumulated funds in securities offered for sale on stock exchanges.

stock option

A form of compensation. Options represent the right (but not obligation) to buy a company's stock at a set price (called the strike price) for a certain period of time. The option becomes valuable to its holder when, and if, the stock price rises above this amount.

shareholder lawsuit

A lawsuit initiated by one or more shareholders to recover damages suffered due to alleged actions of the company's management.

proxy

A legal instrument giving another person the right to vote the shares of stock of an absentee shareholder; in effect, an absentee ballot for shareholders who do not attend the annual meeting in person.

shareholder

A person, group, or organization owning one or more shares of stock in a corporation; the legal owners of the business. (Also investor or stockholder.)

social responsibility shareholder resolution

A resolution on an issue of corporate social responsibility placed before shareholders for a vote at a company's annual meeting.

Investors may receive an economic benefit from the ownership of stock by receiving: -Capital gains. -Dividends -Interest -Both dividends and capital gains.

Both dividends and capital gains.

The board committee that administers and approves salaries and benefits of high-level managers in a company is called: -Compensation. -Executive. -Human resources. -Nominating.

Compensation.

Which of the following is an example of fulfilling social objectives through stock ownership? -Selling stock of companies with a below-market rate of return. -Divesting from Chinese companies that made products using forced labor. -Selling stock of companies that refused to do business with nations that produced conflict minerals. -Investing in Burmese companies that had been accused of human rights abuses.

Divesting from Chinese companies that made products using forced labor.

An argument that opposes the idea of high executive pay is: -High salaries provide an incentive for innovation and risk-taking. -Not many individuals are capable of running today's large, complex organizations. -Top athletes and entertainers make a lot of money, so top executives should, too. -High salaries divert resources that could be used to invest in the business.

High salaries divert resources that could be used to invest in the business.

One of the main reasons that American executives are paid so much is: -Qualified individuals are scarce because most current CEOs were born during the "baby bust" years of the Great Depression. -Most executives are paid based on their performance, and rising compensation reflects the excellent performance of their firms. -Pay is set by the compensation committees of the board, largely comprised of other CEOs who have an interest in pushing compensation up. -High executive compensation in other nations puts upward pressure on the salaries of U.S. executives.

Pay is set by the compensation committees of the board, largely comprised of other CEOs who have an interest in pushing compensation up.

hedge funds

Pools of private capital, so-called because of the aggressive strategies used to earn high returns for their investors.

Securities and Exchange Commission (SEC)

The U.S. federal government agency whose mission is to protect stockholders' rights by making sure that stock markets are run fairly and that investment information is fully disclosed.

social investment

The use of stock ownership as a strategy for promoting social, environmental, and governance objectives. (Also called socially responsible investment or sustainable, responsible, and impact investment, or SRI.)

Which of the following statements is NOT true about shareholders? -They are investors in the company. -They own equal shares of company assets. -Managers pay close attention to their needs and interests. -They are the legal owners of business corporations.

They own equal shares of company assets.

A legal right of shareholders is: Selected Answer: -To vote on who will become chief executive officer (CEO). -To vote on members for the board of directors. -To publish annual financial reports. -To receive interest, if declared.

To vote on members for the board of directors.

say-on-pay

U.S. regulation requiring public companies to hold an advisory shareholder vote on executive compensation at least once every three years; also required in several other countries.

board of directors

An elected group of individuals who have a legal duty to establish corporate objectives, develop broad policies, and select top-level personnel for a company.

proxy access

Changes in the nomination process for a company's Board of Directors that allows shareholders to nominate their own candidates

insider trading

Occurs when a person gains access to confidential information about a company's financial condition and then uses that information, before it becomes public knowledge, to buy or sell the company's stock; generally illegal.

corporate governance

The process by which a company is controlled or governed.


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