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ACCA Applied Skills · Financial Management · Stakeholders and impact on corporate objectives

Shareholders of Daro Co introduce a scheme in which managers receive a bonus if the share price at the end of three years exceeds a target. Which of the following is the main weakness of this approach to controlling managers' goals?

The main weakness is that share price is affected by factors outside managers' control, such as general market movements, so bonuses may reward luck or penalise good performance, weakening the link between managerial effort and reward.

  1. AShare price may be affected by general market movements outside the managers' controlCorrect
  2. BThe scheme cannot be measured because share prices are not observable
  3. CIt encourages managers to focus only on cost minimisation
  4. DIt gives managers no incentive to consider shareholder wealth

Explanation

Share price is observable and linked to shareholder wealth, but it is influenced by market-wide factors, so managers may be rewarded for a rising market or penalised for a falling one regardless of their effort. The scheme does not focus only on costs and does provide a link to shareholder wealth.

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