ACCA Strategic Professional · Strategic Business Leader · Agency
The board of Delmar Industries is considering a remuneration scheme for its chief executive. Shareholders want to reduce the information asymmetry and goal divergence between themselves and the CEO. Which proposal most directly addresses goal divergence?
Granting share options that vest only if total shareholder return beats a peer benchmark over three years best addresses goal divergence. It ties the CEO's reward to the outcome shareholders value, aligning agent and principal interests, whereas fixed pay, a combined chair role or a CEO-chosen auditor do not.
- APaying the CEO a higher fixed salary so that she is not tempted to seek other income
- BGranting the CEO share options that vest only if total shareholder return exceeds a peer group benchmark over three yearsCorrect
- CAppointing the CEO as chair of the board as well to unify leadership
- DReplacing the external auditor with a firm chosen by the CEO
Explanation
Linking a significant part of pay to long-term shareholder return aligns the agent's rewards with the principal's goal, reducing goal divergence. A fixed salary does not link reward to performance. Combining CEO and chair roles weakens oversight, and CEO-selected auditors reduce independence.
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