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CFA Level I · CFA Level I Exam · Organizational Forms, Corporate Issuer Features, and Ownership

A company's board decides that the CEO's annual bonus will depend on both a multi-year share price outcome and a clawback provision for misstated results. This arrangement is most likely intended to:

The arrangement is intended to reduce the agency conflict by aligning management's incentives with long-term shareholder interests. Multi-year share-based pay and clawbacks reward sustained value creation and penalize misstatement, so the CEO's interests move closer to those of the owners.

  1. Atransfer voting control from shareholders to creditors
  2. Breduce the agency conflict by aligning management's incentives with long-term shareholder interestsCorrect
  3. Celiminate the need for independent directors on the board

Explanation

Pay tied to long-term share performance with clawbacks ties the agent's rewards to the principal's outcomes and discourages short-term manipulation. It does not shift votes to creditors, and it does not replace board oversight.

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