ACCA Strategic Professional · Advanced Performance Management · Performance and reward
Lowmere plc wants its chief executive's pay to align with shareholder interests while limiting incentives to manipulate results. Which package is most consistent with agency theory?
The best package combines base salary with shares or options vesting over several years, tied to relative total shareholder return and non-financial targets. This links the executive's wealth to shareholder outcomes, discourages short-termism and manipulation, and avoids rewarding market-wide movements or guaranteed payments unrelated to performance.
- AA fixed salary plus a one-year cash bonus on reported profit
- BA large guaranteed termination payment regardless of performance
- CA mix of base salary and share options or restricted shares vesting over several years, linked to relative total shareholder return and non-financial targetsCorrect
- DA bonus based only on revenue growth in the current quarter
Explanation
Equity-based pay vesting over several years links the executive's wealth to shareholder returns and discourages short-termism. Relative TSR reduces rewards for market-wide movements, and non-financial targets broaden focus. A one-year profit bonus, quarterly revenue bonus or guaranteed payments weaken alignment or encourage manipulation.
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