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ACCA Strategic Professional · Advanced Performance Management · Performance and reward

Brindle plc's finance director is paid a bonus based solely on this year's reported earnings per share. She delays a major R&D project, which would reduce current profit but raise long-term value. Which agency issue does this best illustrate?

This illustrates managerial myopia: a bonus linked to one year's EPS pushes the director to cut or delay long-term investment, so her incentives diverge from shareholders' long-term wealth interests. It is a goal incongruence problem created by a poorly designed short-term reward measure.

  1. AAdverse selection at the recruitment stage
  2. BManagerial myopia caused by a short-term reward metric, creating goal incongruence with shareholdersCorrect
  3. CMoral hazard arising only from lack of audit
  4. DFree-rider behaviour among shareholders

Explanation

A bonus tied to single-year EPS rewards short-term profit, so the agent acts against the principal's long-term wealth interest. This is short-termism or myopia, a goal congruence failure. Adverse selection concerns hidden attributes before contracting, which is not the situation here.

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