External Regulatory Constraints Assignment

Playbook Activity 3.1: Understanding External Regulatory Constraints

Explicit contract components are subject to regulatory constraints by the organization and the government.

These constraints may affect when and how executives earn their compensation and incentives. In this activity, you will reflect on your experiences with the effects of these regulations.

Professor Armstrong describes external constraints imposed by regulations, laws, and exchange listing requirements, including the following:

• Internal Revenue Code, Section 162(m) — prohibiting tax deduction on executives’ salary over one million dollars
• Employee Retirement Income Security Act (ERISA), 1974 — mandating the minimum funding requirements of pensions
• Dodd–Frank Act, Section 954 — clawback provisions

Select one of the external regulatory constraints from the list above and describe how you, an executive you know, or an organization you are familiar with has been affected by it.

Which regulatory constraint will you examine?

Respond to the prompts below:

Describe the circumstances under which the regulation was enforced. Share the regulation’s implications for the executive(s) and organization in question.

Were any executive compensation contracts affected? If so, explain how.

Playbook Activity 3.2: Understanding the Agency— Theoretic Framework

Concerns about incentive problems underlie many important features of explicit and implicit contracts.

Use this activity as an opportunity to evaluate the values or limitations of implementing the standard model.

Respond to the prompts below:

How can the agency theory framework be used to make informed decisions about these problems?

What are the costs, benefits, and limitations of using this model in this context?

How could your organization or an organization you are familiar with use the model to identify potential problems in the incentive compensation contracts it designs for its senior executives?

Which key elements of the framework do you think would or would not work well? Explain your reasoning.

Playbook Activity 3.4: Balanced Scorecard

The overall objective of performance measures is to motivate senior executives to make more value-increasing investments. Organizations use a balanced scorecard to determine how much weight to put on certain performance measures.

Consider performance measures at your organization or an organization of your choice.

Use this balanced scorecard below to strategize which goals and measures to consider when designing an executive compensation contract. Identify at least one for each category.

Respond to these prompts after adding one goal and measure to the balanced scorecard.

Which measure would you give the most weight based on the organization's goals and key performance indicators (KPIs)? Why?

Which measure would you give the least weight based on the organization's goals and KPIs? Why?

How do nonfinancial and financial metrics in an executive's overall compensation contract achieve the desired outcomes?

Provide an example using a financial and non-financial metric from the organization.

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