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IAI Actuarial Core Principles · Business Finance · Corporate governance and the regulation of companies

A listed company's remuneration committee proposes that executive bonuses be based solely on this year's reported profit, paid wholly in cash. Which governance criticism is most valid?

The valid criticism is that tying bonuses only to one year's profit and paying in cash encourages short-term focus and excessive risk-taking, without aligning directors with long-term shareholder value. Good practice uses deferred, share-linked pay and several performance measures over longer periods.

  1. ACash payments are illegal for directors
  2. BBonuses can never be linked to profit
  3. CDirectors must be paid only through dividends
  4. DA short-term, cash-only profit link may encourage excessive risk-taking and neglect of long-term shareholder valueCorrect
  5. Remuneration committees may not propose bonuses

Explanation

Governance practice favours aligning executive pay with long-term value, using deferred or share-based elements and multiple performance measures. A one-year profit measure paid in cash rewards short-term results and can encourage risk or earnings manipulation. The other statements are false.

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