ACCA Strategic Professional · Strategic Business Leader · Agency
Orion Retail's shareholders approve a scheme giving executives share options with an exercise price set at today's share price. Over the following year the market rises strongly due to general economic conditions, and executives gain significantly despite Orion performing worse than its competitors. Which weakness of the scheme does this illustrate?
The scheme illustrates that options tied to absolute share price reward general market rises outside management's control, even when the company underperforms rivals. Vesting conditions based on performance relative to peers would better align reward with managerial contribution.
- AThe options reward market movements outside management's control rather than relative performanceCorrect
- BThe options create excessive monitoring costs
- CThe options fail to give executives any interest in the share price
- DThe options cause executives to become risk-averse
Explanation
Absolute share price targets can reward luck in a rising market. Linking vesting to performance relative to a peer group or index would filter out general market movement. Options do give an interest in share price and tend to encourage risk-taking rather than risk aversion.
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