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ACCA Strategic Professional · Advanced Performance Management · Performance optimisation in specific contexts

Kestrel Water Ltd, a regulated utility, is judged by its regulator on leakage reduction, by shareholders on dividend growth and by customers on bill levels. Management proposes bonuses based solely on dividend growth. Which is the most significant risk of this reward design?

The main risk is that managers cut maintenance and investment to boost profit and dividends, harming leakage performance and customer service. Linking rewards to just one stakeholder's measure creates short-termism and ignores conflicting stakeholder objectives, so a balanced scorecard-style bonus basis is more suitable.

  1. AManagers may cut maintenance spending to lift profit, harming leakage targets and long-term serviceCorrect
  2. BManagers will have too many measures to focus on
  3. CBonuses will be taxed as capital rather than income
  4. DThe regulator will automatically increase customer bills

Explanation

Rewarding only one stakeholder's measure encourages short-term cost cutting, such as deferring maintenance, which damages regulator and customer outcomes. Having too many measures is the opposite of the problem here, since only one is used.

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