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ACCA Applied Knowledge · Financial Accounting · Duties and responsibilities of those charged with governance

A listed company's board wants to reduce the agency problem by aligning directors' interests with those of shareholders. Which remuneration arrangement is MOST likely to achieve this?

Share options that vest only when earnings per share targets are met over several years best align directors with shareholders, because the directors gain only if shareholder value grows. Fixed pay, hours-based bonuses or guaranteed termination payments are not tied to company performance.

  1. AA fixed salary that is unrelated to company performance
  2. BA bonus based on the number of hours worked by the directors
  3. CShare options that vest only if earnings per share targets are met over several yearsCorrect
  4. DA guaranteed payment on early termination of the contract regardless of performance

Explanation

Linking rewards to long-term performance targets, such as share options vesting on EPS growth, ties directors' wealth to shareholder wealth. A fixed salary, hours-based bonus or guaranteed termination payment gives no such link to performance.

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