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ACCA Strategic Professional · Advanced Performance Management · Performance and reward

Kestrel Software's board wants to reward its CEO in a way that reduces the agency problem between shareholders and management over the long term. Which package element is most appropriate?

Shares or options vesting after three years subject to relative total shareholder return conditions are most appropriate. They tie executive wealth to long-term shareholder value and reduce short-termism. Annual earnings-based cash bonuses or size-linked salary can encourage earnings manipulation or growth for its own sake.

  1. AA large cash bonus paid annually on reported earnings per share
  2. BShare options or shares that vest only after three years and subject to relative total shareholder return conditionsCorrect
  3. CA higher fixed salary linked to company size
  4. DA bonus on revenue growth in the current year

Explanation

Deferred shares or options with multi-year vesting and relative TSR conditions tie executive wealth to shareholder returns over time and discourage short-termism. Annual EPS cash bonuses encourage earnings manipulation, and salary linked to size encourages empire-building.

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