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ACCA Strategic Professional · Advanced Performance Management · Performance and reward

Norvale Group's remuneration committee is reviewing the executive scheme. Executives receive large share options exercisable after only 12 months, and the share price has recently been boosted by aggressive cost cutting in research and development. Which change would best reduce the risk of short-termism?

Introducing longer vesting periods with deferral and clawback best reduces short-termism. Executives then bear the long-term consequences of cutting R&D to lift the share price, so their reward depends on sustained value rather than a one-year boost.

  1. AIntroduce a longer vesting period with deferral and clawback provisionsCorrect
  2. BShorten the vesting period so rewards are received sooner
  3. CReplace share options with a fixed salary increase of equal value
  4. DBase the options only on the current year's earnings per share

Explanation

Cutting R&D boosts short-term profit at the expense of long-term value. Longer vesting, deferral and clawback tie executives' wealth to sustained performance. Shorter vesting and annual EPS targets worsen short-termism, while a fixed salary removes the performance link altogether.

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