IAI Actuarial Core Principles · Business Finance · Corporate governance and the regulation of companies
A listed Indian company's board proposes to link a large part of the CEO's pay to growth in share price over a three-year period. Which governance objective is this primarily intended to serve?
Linking CEO pay to share price growth over several years aims to align management's interests with those of shareholders. Managers then benefit when shareholder value rises, which reduces the agency conflict. It is an incentive mechanism, not a tax, audit independence or board composition measure.
- AAligning management's interests with those of shareholdersCorrect
- BReducing the company's tax liability
- CGuaranteeing dividends to preference shareholders
- DEnsuring the auditor remains independent
- Increasing the number of independent directors
Explanation
Pay linked to share price performance over a multi-year horizon makes managers share in the gains and losses of shareholders, which reduces agency conflict. It does not directly address tax, preference dividends, auditor independence or board composition.
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