ACCA Strategic Professional · Advanced Performance Management · Performance and reward
Orion Foods rewards its CEO with share options exercisable after one year, based on share price. The CEO announces large buybacks funded by debt, postpones research projects with returns over five years, and times good-news announcements before the vesting date. Which redesign would best address ALL these concerns?
The best redesign is deferred share awards vesting over several years with holding requirements, long-term and non-financial measures, and clawback provisions. This reduces incentives to time announcements, boost the share price with debt-funded buybacks or cut long-term research, while keeping the CEO aligned with shareholders. Shorter vesting or one-year EPS would aggravate the problems.
- AShorten the vesting period to six months so rewards are more closely linked to effort
- BReplace options with a higher fixed salary and no performance link
- CUse shares vesting over several years with holding requirements, combined with long-term and non-financial measures, plus clawback provisionsCorrect
- DBase the award entirely on earnings per share growth for the current year
Explanation
Multi-year vesting and holding requirements counter timing of announcements and short-term share price boosting. Long-term and non-financial measures encourage investment in research, and clawback deters manipulation. Shorter vesting worsens short-termism, EPS for one year is easily manipulated by debt-funded buybacks, and fixed salary removes alignment with shareholders.
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