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ACCA Strategic Professional · Advanced Performance Management · Performance and reward

Nordvik Plc pays its chief executive an annual cash bonus based solely on that year's reported profit before tax. Shareholders are concerned that the CEO is cutting research spending near year-end to hit the target. Which feature of the reward scheme most directly explains this behaviour?

The behaviour is explained by the bonus being tied to a short-term accounting profit measure. Cutting discretionary research raises current-year profit and so the bonus, while harming long-term value, which is the classic short-termism problem in executive reward.

  1. AThe bonus is tied to a short-term accounting measure, encouraging short-termismCorrect
  2. BThe bonus is paid in cash rather than shares, which removes any link to risk
  3. CThe bonus is capped at a fixed percentage of salary, reducing motivation
  4. DThe bonus is determined by the remuneration committee, which lacks independence

Explanation

A bonus based on one-year reported profit rewards actions that raise current profit even if they harm long-term value, such as cutting discretionary R&D. Cash payment and caps do not by themselves create this incentive, and the committee's independence is not indicated in the scenario.

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