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ACCA Strategic Professional · Advanced Financial Management · Corporate environmental, social, governance (ESG) and ethical issues

Delta plc's CEO receives a bonus of 2% of the amount by which reported earnings per share exceeds $1.00. Earnings are $50m with 40m shares. Delta plc could cut $6m of R&D that would reduce long-term value but raise this year's earnings by the same after-tax amount. By how much would the bonus-driving EPS excess rise, and which ethical concern does this illustrate?

The excess rises by $0.15 per share, from $0.25 to $0.40, because $6m extra earnings over 40m shares adds $0.15. This illustrates short-termism arising from an agency conflict, where a bonus tied to current EPS encourages harming long-term value.

  1. A$0.15 rise; short-termism driven by an agency conflict between management and shareholdersCorrect
  2. B$0.15 rise; no concern because EPS is audited
  3. C$0.06 rise; short-termism driven by an agency conflict
  4. D$6.00 rise; a corporate social responsibility failure only

Explanation

EPS currently 50/40 = $1.25. Extra earnings of $6m add 6/40 = $0.15, giving $1.40, so the excess over $1.00 rises from $0.25 to $0.40, a rise of $0.15. Cutting R&D to lift the bonus illustrates short-termism from poorly aligned incentives (agency problem).

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