ACCA Strategic Professional · Strategic Business Leader · Governance scope and approaches
Brandt Plc's board is considering a new remuneration scheme to reduce agency costs. The chief executive currently receives a fixed salary and is reluctant to pursue risky but profitable projects. Which change is most likely to align the chief executive's interests with shareholders?
Share options vesting on total shareholder return over several years best align the chief executive with shareholders, because the agent's rewards then depend on the same outcome the principals want. Fixed pay, staff numbers or budget size do not link reward to shareholder value.
- AAward share options that vest only if total shareholder return exceeds an agreed benchmark over three yearsCorrect
- BIncrease the fixed salary to reflect the responsibility of the role
- CPay an annual bonus based on the number of staff the chief executive manages
- DIntroduce a bonus linked to the size of the company's head office budget
Explanation
Linking reward to shareholder return over a multi-year period ties the agent's wealth to the principal's wealth and encourages sensible risk-taking. A higher fixed salary does not change incentives, and bonuses tied to staff numbers or budgets reward empire-building rather than shareholder value.
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