ACCA Strategic Professional · Advanced Financial Management · Corporate environmental, social, governance (ESG) and ethical issues
Brandt Group's board wants to align the finance director's interests with shareholders. Currently 100,000 share options are proposed with an exercise price equal to today's share price of $5.00. Which design feature would most reduce the risk that the options reward luck or market movements rather than the director's performance?
Vesting based on relative total shareholder return over three years is best. Comparing with a peer group removes market-wide effects, so the director is rewarded only for outperformance, and the multi-year period promotes long-term decisions. Repricing options, immediate exercise or short-term revenue targets all weaken the link to genuine performance.
- AVesting conditional on total shareholder return relative to a peer group over three yearsCorrect
- BLowering the exercise price if the share price falls
- CAllowing exercise immediately after grant
- DBasing vesting on the current year's revenue growth only
Explanation
Relative TSR strips out general market movements, so only outperformance of peers is rewarded, and a three-year period supports long-term focus. Repricing after a fall rewards failure, immediate exercise gives no retention or long-term link, and single-year revenue growth is short-term and ignores profitability.
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