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ACCA Strategic Professional · Strategic Business Leader · The board of directors

Brandt Holdings pays its executive directors a bonus that depends solely on this year's reported profit before tax. Over three years, directors have cut research spending and delayed maintenance to hit targets, while long-term shareholder value has fallen. Which change to the remuneration design would best address this agency problem?

Introducing long-term incentives, such as shares that vest after several years based on multi-year shareholder return and strategic measures, best addresses the problem. This aligns director rewards with long-term shareholder value and reduces the temptation to cut investment to hit one-year profit targets.

  1. AIncrease the fixed basic salary and remove all performance-related elements
  2. BPay the annual bonus entirely in cash so directors can invest it elsewhere
  3. CAdd long-term incentives, such as shares vesting after several years linked to multi-year total shareholder return and other strategic measuresCorrect
  4. DRaise the profit target each year while keeping the bonus based on single-year profit

Explanation

The behaviour reflects short-termism caused by a single-year profit metric. Long-term share-based awards with multi-year vesting and broader measures align directors' interests with those of shareholders. Raising the target (option D) would worsen the short-term pressure, and removing performance pay (A) removes alignment altogether.

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