six layers, two regulators, one shareholder vote
Executive compensation architecture
The board\'s comp committee designs a six-layer package; the SEC, IRS, and proxy advisors each take a bite. Senior HR is at the table for every cut.
pay-for-performance, defined
What share of total comp disappears if performance fails?
That number is the answer. Bonus tied to a metric isn\'t enough — if 90% of pay is base and 10% is at risk, the exec is paid the same whether the year goes well or badly. ISS and Glass Lewis weight this proportion heavily in their Say-on-Pay recommendations.
Four constraints senior HR memorizes by name
§162(m)
Compensation above $1M loses the company tax deduction.
Hits the company\'s tax bill, not the executive\'s. The exam may offer "the executive pays more tax" — that\'s wrong. Performance-based exception was repealed in 2017; the cap now applies broadly to top officers.
SEC clawback rule, 2022
Listed companies must recoup incentive comp on a restatement.
Replaces the narrower SOX §304 era. Three-year lookback, applies to all current and former Section 16 officers, no fault required. A boilerplate-only clawback policy fails the exam.
Dodd-Frank §953(b)
CEO-to-median-employee pay ratio appears in the proxy each year.
S&P 500 average sits around 350:1 (AFL-CIO 2024). The exam tests that this is disclosure, not a cap. But the disclosure shapes shareholder votes — and senior HR owns the methodology and the narrative around the number.
Say-on-Pay
Advisory shareholder vote, every one to three years.
Not binding. But losing it triggers ISS scrutiny next year, damages the CEO\'s relationship with the board, and ends up in the proxy narrative for years. Functionally significant.
Exam Traps
Section 162(m) hits the COMPANY tax deduction
Not the executive's tax. The exam may offer "the executive pays more tax" as a wrong answer. The correct answer is "the company loses the tax deduction for compensation over $1 million."
Stock options are NOT the same as RSUs
Options have a strike price and pay nothing if stock declines below it. RSUs are outright stock grants that retain value. The exam tests this distinction.
Clawback obligations are no longer optional
Under the SEC's 2022 final rule, listed companies must have a clawback policy. The exam may treat the SOX 304-only era ("clawback only for CEO/CFO in restatement") as outdated.
ISS and Glass Lewis are NOT regulators
They are private proxy advisors. Their recommendations drive institutional voting but are not binding. The exam tests this distinction.
Performance is at-risk proportion
Pay-for-performance is not just bonus tied to a metric. It is the proportion of total compensation at risk if performance fails.
CHRO in the room
Senior HR partners with finance and legal on executive comp. The CHRO is in the room with the compensation committee, not just briefed afterward.
Base salary at peer group benchmark, watching for 162(m) tax deduction loss above $1M.
Annual bonus tied to short-term metrics that signal the board's priorities.
Equity compensation in mix of RSUs and PSUs to align long-term shareholder value with executive wealth.
LTI vesting over 3-5 years to retain executives and reward long-horizon thinking.
Clawback policy meeting SEC 2022 requirements for recoupment in restatement scenarios.
Perks reviewed against ISS and Glass Lewis benchmarks. Excess generates Say-on-Pay opposition.
Compensation committee approves. Proxy discloses. Shareholders vote.
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