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ACCA Applied Knowledge · Business and Technology · Governance in business organisations

Dorval plc introduces a long-term incentive plan giving its executive directors share options that can only be exercised after five years, provided the share price has outperformed a sector index. What is the main agency-related purpose of this design?

The aim is to align directors' interests with long-term shareholder wealth. Options that vest after five years and depend on outperforming an index reward sustained share price growth, discouraging short-term manipulation of results. It reduces the agency problem but does not remove the need for audit or other monitoring.

  1. ATo align directors' interests with long-term shareholder wealth and discourage short-termismCorrect
  2. BTo remove the need for any external audit
  3. CTo transfer ownership of the company to employees immediately
  4. DTo guarantee directors a fixed income regardless of performance

Explanation

Options vesting after five years and linked to relative share price performance tie directors' rewards to shareholder returns over the long term, reducing the incentive to inflate short-term results. It does not replace monitoring such as audit, nor guarantee income, which would weaken alignment.

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