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ACCA Strategic Professional · Advanced Performance Management · Performance and reward

Halden Co is considering how to reduce agency costs. Which of the following measures is a bonding cost, rather than a monitoring cost, in agency theory?

A bonding cost is one the agent incurs to reassure the principal, such as managers contractually committing to detailed reporting and accepting limits on their authority. Audits, remuneration committees and board variance reviews are monitoring costs, since the principal or company imposes them on the agent.

  1. AAppointing an external auditor to review the managers' accounts
  2. BEstablishing an independent remuneration committee to oversee pay
  3. CThe managers contractually agreeing to submit detailed reports and accept restrictions on their authority at their own initiativeCorrect
  4. DSetting up internal budget variance reviews by the board

Explanation

Bonding costs are incurred by the agent to assure the principal that the agent will act in the principal's interest, such as contractual commitments and self-imposed reporting. Auditors, remuneration committees and board reviews are monitoring costs borne by the principal. Hence only the agent-initiated commitments qualify.

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