Corporate Governance: practice question
Osmund Foods discloses that its chief executive's total compensation for the year consists of a salary of $2.4 million; an annual bonus of $1.8 million payable only if earnings per share grow by at least 8%; restricted shares worth $2.6 million that vest in four years regardless of results; and performance shares worth $1.6 million that vest only if a three-year return-on-equity target is met. The proportion of the chief executive's total compensation that is contingent on performance is closest to:
- 21.4%
- 40.5%
- 71.4%
Show answer and explanation
Correct answer: B
Working: Performance-contingent pay = 1.8 + 1.6 = 3.4; total = 2.4 + 1.8 + 2.6 + 1.6 = 8.4; 3.4 / 8.4 = 0.4048 → 40.5%.
Explanation: Only pay that depends on achieving results is performance-contingent: the EPS-linked bonus of $1.8 million and the ROE-linked performance shares of $1.6 million total $3.4 million of the $8.4 million, and 3.4 / 8.4 = 40.5%. The 21.4% option counts only the cash bonus and assumes equity awards are never performance-related, overlooking that the performance shares vest solely if the ROE target is met. The 71.4% option adds the time-vesting restricted shares, which transfer value after four years whatever the results and therefore reward retention, not performance.
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