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ACCA Strategic Professional · Advanced Performance Management · Performance and reward

Karvel plc wants a reward scheme for its finance director that aligns her interests with long-term shareholder value and discourages short-term earnings manipulation. Which scheme feature is most appropriate?

Deferred shares vesting after three years subject to relative total shareholder return best align the director with long-term shareholder value. The long vesting period and market-based condition reduce the payoff from short-term earnings manipulation, unlike annual EPS or quarterly profit bonuses.

  1. AAn annual cash bonus based on reported earnings per share
  2. BShares granted that vest after three years subject to relative total shareholder return and a retention requirementCorrect
  3. CA higher fixed salary with no variable pay
  4. DA bonus based on quarterly profit before tax

Explanation

Deferred shares vesting over several years with a relative TSR condition tie reward to sustained shareholder returns and make short-term manipulation less beneficial. Annual EPS or quarterly profit bonuses encourage short-termism. A fixed salary gives no alignment.

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