ACCA Strategic Professional · Strategic Business Leader · Agency

Halden Group pays its divisional managers a bonus based solely on current-year reported profit. Managers have cut research spending and delayed maintenance, lifting bonuses but harming long-term value. Which is the most appropriate governance response consistent with reducing this agency cost?

Link a substantial part of pay to long-term shareholder value using deferred, share-based awards and clawback. This aligns managers' rewards with lasting performance, countering the short-term profit focus that produced the cuts, whereas fixed pay or more frequent profit reporting would not fix the misalignment.

ALink a significant part of remuneration to long-term shareholder value, with deferred or share-based elements and clawbackCorrect
BReplace all bonuses with fixed salaries and remove performance measurement
CIncrease the frequency of profit reporting to monthly only
DReduce the number of non-executive directors to cut costs

Explanation

The problem is short-termism from a poorly designed incentive. Aligning pay with long-term value through deferral, shares and clawback addresses it. Fixed salary removes motivation and creates other agency losses; more frequent profit reporting reinforces short-termism; fewer NEDs weakens monitoring.

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