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ACCA Applied Skills · Financial Management · Financial objectives and relationship with corporate strategy

A company grants its directors share options exercisable in three years at today's share price of $4.00. Which is the most significant way this helps align directors' interests with shareholders?

Share options pay off only if the share price rises above the $4.00 exercise price, so directors benefit when shareholder wealth increases. This links their reward to share price performance rather than guaranteeing a gain regardless of results.

  1. ADirectors gain only if the share price rises above $4.00, linking their reward to shareholder wealthCorrect
  2. BDirectors are guaranteed a gain whatever the share price does
  3. CDirectors' pay is tied to accounting profit, which cannot be manipulated
  4. DDirectors lose money if the share price rises, so they avoid risk

Explanation

The options only have value if the market price exceeds the $4.00 exercise price, so directors share in share price increases. They are not guaranteed a gain, and the reward is linked to market price, not accounting profit. A rise benefits, not harms, the holder.

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