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ACCA Strategic Professional · Advanced Performance Management · Strategic management accounting

Brantley Ltd's managers are rewarded on annual accounting profit. The board is concerned that managers cut research spending and delay maintenance near year-end to hit targets, damaging long-term shareholder value. Which change would best address this concern?

The best change is an EVA-based bonus with part deferred or paid in shares over several years. This links reward to returns above the cost of capital and discourages short-term cuts in research and maintenance, aligning managers' interests with long-term shareholder value.

  1. APay the bonus solely on current year revenue growth
  2. BIntroduce a bonus based on EVA, with part deferred or paid in shares over several yearsCorrect
  3. CRaise the annual profit target by 10%
  4. DPay a fixed salary increase in place of any bonus

Explanation

EVA charges for capital and, with adjustments such as capitalising R&D, discourages short-term cuts; deferring or share-settling pay aligns managers with long-term value. Revenue growth or a higher profit target would keep the short-term focus. A fixed salary removes any link to performance.

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