Deck 14: executive compensation and employee benefits

Question 1

The option exercise price in an employee stock purchase plan must be uniform for all eligible employees.

Answer 1

True

Question 2

Employee benefit plans that do not relate to pensions are exempted from ERISA rules on reporting,disclosure,and fiduciary responsibility.

Answer 2

False

Question 3

All state laws affecting in any way a plan coming under ERISA are preempted.

Answer 3

False

Question 4

Executive compensation is generally set by a group of the company's board of directors known as the audit committee.

Question 5

Many types of employee benefit plans are regulated by the federal Employee Retirement Income Security Act.

Question 6

An employee who receives stock in connection with a restricted stock plan is taxed at ordinary income tax rates to the extent that the stock value when received exceeds the amount paid.

Question 7

Any ERISA plan fiduciary who breaches a duty is personally liable for the losses resulting from the breach.

Question 8

Employers usually use employee stock purchase plan options as a way for rank-and-file employees to share in the growth of the company by purchasing stock.

Question 9

When a nonqualified stock option is involved,the spread is taxable to the optionee as ordinary income whether or not the optionee actually sells the shares.

Question 10

For growth-oriented smaller companies,stock options are an ineffective way to preserve cash.

Question 11

Multiemployer pension plans are barred by ERISA.

Question 12

By federal law,a stock option must carry a guarantee that the optionee will not lose any money and can always redeem the stock at the price at which it was purchased.

Question 13

Shareholder proposals regarding executive compensation are disallowed by the Securities and Exchange Commission.

Question 14

Stock options are an approved and well established mechanism for existing owners to sell shares.

Question 15

Federal law prohibits employers from allowing payroll deductions as a way for employees to purchase stock under an employee stock purchase plan.

Question 16

Congress has used federal tax laws to provide incentives to encourage certain types of executive compensation such as options.

Question 17

Whether a public company may make loans to directors is strictly a matter of state law.

Question 18

The directors of privately held corporations are held to the same standards that are applied to the directors of public corporations.

Question 19

Incentive stock options are frequently used by publicly held companies whereas nonqualified stock options are more typically used by privately held companies.

Question 20

The U.S.courts of appeals are split on the issue of whether an ERISA fiduciary has an affirmative duty to disclose proposed changes in benefits in the absence of employee inquiries.

Question 21

________ stock is stock whose sale or acquisition is subject to restrictions imposed by securities laws.

A)Encumbered
B)Restricted
C)Contingent
D)Vested

Question 22

When by law could U.S.companies first offer stock options to employees?

A)1922
B)1932
C)1964
D)none of the responses are correct

Question 23

What does the 2004 rule of the Financial Accounting Standards Board require regarding the reporting of stock option awards?

A)That they be disclosed in footnotes in annual reports.
B)That they be treated as an expense.
C)That they be treated as a capital loss.
D)That they be reported to the International Stock Exchange.

Question 24

To receive favorable tax treatment when buying shares in an employee stock purchase plan,an employee can own no more than ____ of the voting power of the employer or ____ of the value of all shares of stock of the employer.

A)5%,5%
B)5%,10%
C)3%,8%
D)9%,4%

Question 25

Who is responsible for setting the compensation of corporate officers?

A)The shareholders.
B)The president of the corporation.
C)The directors.
D)The chief executive officer.

Question 26

The exercise of a(n)________ stock option generally entitles a company get to take a deduction from its earnings without further considerations.

A)nonqualified
B)incentive
C)both nonqualified and incentive
D)neither nonqualified nor incentive

Question 27

An employee stock purchase plan must provide that no employee can accrue the right at any time to purchase more than ________ of stock per calendar year,valued at the fair market value of such stock.

A)$12,000
B)$15,000
C)$20,000
D)$25,000

Question 28

Which of the following allows employees to defer a portion of their salaries on a pretax basis into an investment fund set up by the company?

A)250(b)plans.
B)employee stock ownership plans.
C)employee investment plans.
D)401(k)plans.

Question 29

Which of the following is a federal law regulating pension plans and many types of employee benefit plans?

A)The Employment Regulatory Enforcement Act.
B)The Employee Retirement Income Security Act.
C)The Pension,Retirement,and Benefit Act
D)There is no such federal law.

Question 30

ERISA provides that officers and trustees of a pension plan are

A)public executives.
B)public administrators.
C)public employees.
D)fiduciaries.

Question 31

What are the principal federal act(s)regulating securities transactions and issuers?

A)The Transactions Act of 1999.
B)The Stock Issuance Act of 1934.
C)Both the Transactions Act of 1999 and the Stock Issuance Act of 1934.
D)Neither the Transactions Act of 1999 nor the Stock Issuance Act of 1934.

Question 32

A principal kind of stock option is a(n)

A)nonqualified stock option
B)taxable stock option.
C)vested stock option
D)all of the responses are correct

Question 33

In a ________ retirement plan,the employer guarantees the employee a specific payment regardless of the total contributions made to the plan or the plan's investment performance.

A)defined benefit
B)defined contribution
C)specific contribution
D)total contribution

Question 34

Which of the following in true regarding standard(s)set by the Sarbanes-Oxley Act pertaining to compensation committees?

A)The Act requires that the compensation committee be made up entirely of outside directors.
B)The Act requires that no more than 10% of the compensation committee be made up of inside directors.
C)The Act requires that shareholders directly elect the compensation committee.
D)The Act does not address the makeup of the compensation committee.

Question 35

A ________ gives the person to whom it is granted the right to buy a certain number of shares at a fixed price for a fixed number of years.

A)stock option
B)stock release
C)securities release
D)security allowance

Question 36

The ________ is the price at which an optionee can exercise stock options by purchasing stock.

A)purchase price
B)strike price
C)option price
D)qualified price

Question 37

ERISA does not

A)impose fiduciary obligations on pension plan administrators.
B)require detailed disclosure of certain pension plan information.
C)establish maximum funding requirements.
D)substantially restrict the investment of pension plan assets.

Question 38

By filing an election under Section 83(b)of the Internal Revenue Code within thirty days of exercising an option to purchase shares subject to a restricted plan

A)an employee elects to pay tax at the time the stock is purchased in an amount equal to what would be due if the stock were not subject to vesting.
B)an employee elects to pay tax periodically as the stock vests.
C)an employee elects to pay tax only after all the stock vests.
D)none of the responses are correct.

Question 39

Which of the following is a principal requirement of an employee stock purchase plan?

A)The plan must include all groups of employees,including part-time employees.
B)The plan must be implemented after shareholder approval.
C)The right to purchase stock under the plan must be transferable.
D)All of the responses are correct.

Question 40

A(n)________ gives an employer the right to recoup some or all of an employee's stock option gain if he or she goes to work for a competitor within a certain period of time following exercise of the option.

A)penalty provision
B)forfeiture provision
C)clawback provision
D)snake provision

Question 41

Fact pattern 14-1
Constance is a CEO of a publicly traded company.She has a meeting with the board of directors regarding raises for officers.Constance tells the board that the Securities and Exchange Commission has no power to regulate executive compensation and that the agency cannot require disclosure to shareholders.She tells the directors that the officers are entitled to large raises and that the raises can be kept entirely confidential.
Refer to fact pattern 14-1.Which of the following is true regarding the statement by Constance that the Securities and Exchange Commission has no power to regulate executive compensation?

A)She is correct that the Securities Exchange Commission has no authority to interfere in decisions made by a company regarding executive compensation.
B)She is correct except that the Securities and Exchange Commission does have the power to regulate executive compensation payable in the form of employer stock.
C)She is incorrect because the Securities and Exchange Commission has the power to regulate any executive compensation in excess of 1 million dollars.
D)She is incorrect because the Securities and Exchange Commission has the power to regulate any executive compensation in excess of 2 million dollars.

Question 42

Tony,the CEO,of a publicly traded company that sells exercise equipment has done a good job; and the price per share of the company's stock had increased at a rapid rate during the past year.Tony encourages the board of directors of the company to grant stock options to him.He requests,however,that the grant date for the options be set during the previous year so that he can purchase the stock at a cheaper rate.Which of the following is true regarding his request?

A)This practice is a great option for Tony if the board members agree; and there is no problem with SEC regulation or with civil or criminal liability.
B)This practice,called backdating,is not a good idea because while it the practice is not illegal,investors generally frown on this practice.
C)This practice,called backsetting,is always illegal.
D)This practice,called backdating,is not always illegal; but it is illegal if done without appropriate disclosure.

Question 43

What do you believe should be done to provide health insurance in this country? What problems exist,and how should they be remedied? Discuss fully.

Question 44

The board of directors of A-1 Company sets vesting restrictions on stock options for executives.What do "vesting restrictions" mean?

Question 45

ERISA expressly requires that private pension plans use the ________ person investment standard.

A)educated
B)responsible
C)prudent
D)studied

Question 46

Which of the following is required by the SEC and provides a narrative overview for stockholders explaining material elements of compensation for a company's named executive officers along with insight for the public into the company's compensation policies?

A)The "Compensation Discussion and Analysis"
B)The "Compensation Review"
C)The "Policy and Reform Goals"
D)The "Pay Equity Policy"

Question 47

Fact pattern 14-1
Constance is a CEO of a publicly traded company.She has a meeting with the board of directors regarding raises for officers.Constance tells the board that the Securities and Exchange Commission has no power to regulate executive compensation and that the agency cannot require disclosure to shareholders.She tells the directors that the officers are entitled to large raises and that the raises can be kept entirely confidential.
Refer to fact pattern 14-1.Which of the following is true regarding the statement by Constance that the Securities and Exchange Commission has no power to require disclosure of executive compensation to shareholders?

A)She is incorrect,and the Securities and Exchange Commission has the power to require disclosure of executive compensation matters.
B)She is incorrect,but the Securities and Exchange Commission only has the power to regulate disclosure of executive compensation in excess of 1 million dollars.
C)She is incorrect,but the Securities and Exchange Commission only has the power to regulate disclosure of executive compensation in excess of 2 million dollars.
D)She is correct.

Question 48

Cynthia receives health benefits under her employer-sponsored health insurance plan which was covered by ERISA.She applied for pre-approval for surgery to repair a deviated septum in her nose that she and her physician believed was interfering with her breathing.The plan administrator,Plan X,denied the surgery on the basis that it was cosmetically based.Cynthia proceeded to sue Plan X in a state court in her home state for medical malpractice.The plan administrator's home state is different from that of Cynthia.Which of the following is the most likely result?

A)She will be allowed to proceed and have a jury determine her claims.
B)She will be allowed to proceed,but the judge,not a jury,will determine her claims.
C)Her case will be dismissed because it is preempted by ERISA.
D)Her case will be dismissed because it should have been filed in the administrator's home state.

Question 49

What is the meaning of the term "restricted stock" in the context of executive compensation?

Question 50

Which of the following involves a promise to pay a bonus in cash in the future based upon an amount equal to the value of a share of company stock.

A)Wildcat stock
B)Phantom stock
C)Pheasant stock
D)Approved stock

Question 51

Which of the following is true regarding executive compensation in the U.S.?

A)There is no public consensus in the U.S.as to the correct amount of compensation that should be paid to an executive of a publicly traded company.
B)The Sarbanes-Oxley Act limits the amount of compensation that may be paid to executives of publicly traded companies.
C)Most states limit the amount of compensation that may be paid to executives of publicly traded companies.
D)The Sarbanes-Oxley Act limits the amount of compensation that may be paid to executives of publicly traded companies and also most states impose such limits.

Question 52

Fact pattern 14-2
Jan is a participant in an employer sponsored disability insurance plan.Her former employer,Generous,provided the plan; and it was administered by ABC Insurance Co.Jan was initially awarded benefits a few years ago based upon a back problem.Her ex-husband,however,reported to the plan administrator that Jan was not really disabled and that she was engaged in the following activities with her new boyfriend: horseback riding,dancing the tango,scuba diving,and mountain climbing.After investigation,ABC promptly discontinued her disability benefits.Jan calls up the plan administrator and says that she is having significant back problems,that her ex-husband and ABC's private investigators are all liars,and that she is going to sue.Jan says that both Generous and ABC are biased and that all they want to do is save money,not take care of the disabled.Jan says that a federal court will straighten out the plan administrator's conflict of interest.
Refer to fact pattern 14-2.In making its decision,how would a court likely address Jan's claim of a conflict of interest?

A)Since the employer is not the plan administrator,there is no conflict of interest.
B)A conflict of interest would be found to exist,but it would be given no weight by the court.
C)The conflict would be weighted as a factor in the court's decision.
D)The conflict would result in de novo review and a requirement that the administrator justify its decision by clear and convincing evidence.

Question 53

What three fundamental beliefs to the Securities Act of 1933 and the Securities Exchange Act of 1934 reflect?

Question 54

What did the court rule in Pegram v.Herdrich,the case discussed in the text in which the plaintiff's appendix ruptured while she was waiting several days for an ultrasound,and she claimed that the HMO involved breached its fiduciary duty by rewarding physicians for cutting costs?

A)That the HMO was a fiduciary because it could control medical treatment options.
B)That the HMO was not a fiduciary under the circumstances of the case.
C)That the HMO was a fiduciary only because mixed eligibility decisions were involved.
D)That the HMO was a fiduciary under state law but not under ERISA.

Question 55

Fact pattern 14-2
Jan is a participant in an employer sponsored disability insurance plan.Her former employer,Generous,provided the plan; and it was administered by ABC Insurance Co.Jan was initially awarded benefits a few years ago based upon a back problem.Her ex-husband,however,reported to the plan administrator that Jan was not really disabled and that she was engaged in the following activities with her new boyfriend: horseback riding,dancing the tango,scuba diving,and mountain climbing.After investigation,ABC promptly discontinued her disability benefits.Jan calls up the plan administrator and says that she is having significant back problems,that her ex-husband and ABC's private investigators are all liars,and that she is going to sue.Jan says that both Generous and ABC are biased and that all they want to do is save money,not take care of the disabled.Jan says that a federal court will straighten out the plan administrator's conflict of interest.
Refer to fact pattern 14-2.Which of the following will the court consider in determining whether a de novo or deferential standard of review is appropriate when reviewing the decision of the plan administrator?

A)Whether the plan grants the administrator discretionary authority making benefit determinations.
B)How many times the administrator has denied benefits in the past 12 months.
C)The size of the plan.
D)All of the responses are correct.

Question 56

Which of the following involves a promise to pay a bonus in the future in the form of a share of the company's stock?

A)A restricted stock unit
B)An allocated stock obligation
C)An approved stock unit
D)A floating stock promise

Question 57

What criticism of restricted stock plans do stock option plans avoid,and how is that done?