Explanation:
Incentive-based compensation has its benefits, but too much emphasis creates an incentive for management to take excessive risks. Deferred payment schemes align managerial decisions with a longer-term view. Multiyear guarantees do not provide structure for effective decision making because no matter what the decision, there will be a bonus.
(Book 1, Module 3.2, LO 3.d)
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Question 92
Compensation committees serve numerous roles. Primarily, though, they are charged with creating appropriate remuneration packages that include attention to risk exposures and balance between short-term, intermediate-term, and long-term financial performance. Attention to compensation details has become much more prominent since the financial crisis. Which of the following is an example of a G20 compensation reform recommendation to enhance compensation effectiveness?
A
Limit the amount of incentive-based compensation.
B
Maximize the amount of incentive-based compensation.
C
Eliminate deferred payment compensation schemes.
D
Extend multiyear bonus guarantees.
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