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ACCA Strategic Professional · Advanced Financial Management · Strategic business and financial planning for multinational organisations

A multinational's executives receive bonuses based mainly on annual accounting profit. Which problem is this scheme MOST likely to create for shareholder wealth maximisation?

The scheme risks short-termism: managers may boost current accounting profit by cutting discretionary spending or rejecting long-term positive NPV projects, which harms shareholder wealth. This is a goal congruence problem, better addressed by long-term incentives tied to share price, TSR or economic value measures.

  1. AManagers will focus on long-term positive NPV projects that reduce current profit
  2. BManagers may favour short-term profit at the expense of long-term value, a goal congruence problemCorrect
  3. CManagers will always raise dividends excessively
  4. DManagers will have no incentive to control costs

Explanation

Rewarding annual accounting profit encourages short-termism, such as cutting R&D or delaying investment, which can reduce long-term value. Linking rewards to share price, TSR or economic value measures with long-term vesting improves goal congruence. Option A states the opposite effect.

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