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ACCA Strategic Professional · Advanced Performance Management · Performance and reward

Dravon plc operates a long-term incentive plan (LTIP) in which shares vest after three years only if total shareholder return (TSR) ranks in the top quartile of a comparator group of 20 listed companies. Which statement about this design is most accurate?

Relative TSR vesting adjusts for market-wide movements, which is its main strength, but it remains imperfect. Outcomes depend on how the comparator group is chosen and can be affected by factors beyond managers' control, and a three-year period does not entirely remove short-term behaviour.

  1. AIt adjusts for market-wide movements, but TSR can still be influenced by factors outside managers' control and the choice of comparator groupCorrect
  2. BIt eliminates short-termism entirely because shares vest after three years
  3. CIt rewards managers only for achieving internal accounting profit targets
  4. DIt removes the need for any judgement because TSR is unaffected by the comparator selection

Explanation

Relative TSR filters out general market movements, which is a strength over plain options. However, results depend on the comparator group chosen and on external factors, and three years does not wholly remove short-term incentives. The measure is market-based, not an internal accounting profit target.

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