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ACCA Strategic Professional · Advanced Performance Management · Performance and reward

Kestrel Components pays its divisional managers a bonus only if annual divisional profit exceeds budget. In the final quarter, one manager delays essential equipment maintenance and cuts staff training to reach the target. Which feature of the bonus scheme most directly explains this behaviour?

The bonus depends on one short-term financial measure, annual profit against budget. Managers can hit it by cutting discretionary costs like maintenance and training, which damages long-term value. This is classic short-termism caused by narrow, period-end financial targets rather than a balanced set of measures.

  1. AThe scheme rewards a single short-term financial measure, encouraging actions that sacrifice long-term valueCorrect
  2. BThe scheme uses too many non-financial measures, which confuses managers
  3. CThe scheme is based on relative performance against competitors
  4. DThe scheme pays a fixed salary that is unrelated to results

Explanation

A bonus tied to one annual profit figure encourages managers to cut discretionary spending such as maintenance and training, which boosts current profit but harms future performance. The scheme does not use non-financial measures or relative comparisons, and the bonus is variable, not fixed.

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