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ACCA Strategic Professional · Advanced Performance Management · Performance and reward

Brightwater Plc's remuneration committee is redesigning executive pay to align with long-term shareholder value and reduce risk-taking for short-term gain. Which design is most consistent with this aim?

The best design defers part of the bonus into shares with clawback and adds an LTIP with multi-year relative TSR and ROCE conditions. This links pay to sustained shareholder value, discourages short-term risk-taking and allows recovery if results prove misstated.

  1. APart of the annual bonus deferred into shares with clawback provisions, plus an LTIP with a three-year relative TSR and an ROCE conditionCorrect
  2. BA larger fixed salary with no variable pay, to remove all performance incentives
  3. CAn annual cash bonus based only on revenue growth, paid in full at year-end
  4. DShare options exercisable after one year at an exercise price set below market value

Explanation

Deferral into shares, clawback and multi-year performance conditions tie reward to sustained value and allow recovery if results are later restated. Revenue-only cash bonuses and discounted one-year options encourage short-term or risky behaviour; removing variable pay removes alignment altogether.

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