IAI Actuarial Core Principles · Business Finance · Corporate governance and the regulation of companies
A listed company wants its executive pay to encourage long-term value creation rather than short-term share price spikes. Which design feature best serves that aim?
Shares that vest after three to five years subject to performance conditions best encourage long-term value creation, because executives only gain if sustained performance is delivered. Short vesting, one-year revenue bonuses and peak-price payouts reward short-term behaviour, and fixed salary rises carry no performance link.
- AGranting share options that vest in full after six months
- BPaying a large cash bonus based only on this year's revenue
- CAwarding shares that vest after three to five years subject to performance conditionsCorrect
- DRaising fixed salary each year in line with company size
- Paying a bonus on the day the share price reaches a peak
Explanation
Deferred shares with performance conditions tie rewards to sustained performance over several years. Short vesting periods, single-year revenue bonuses and peak-price payouts encourage short-termism. Higher fixed salary has no performance link at all.
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