ACCA Strategic Professional · Strategic Business Leader · Agency
The CEO of Carvelle Group is paid a bonus based solely on this year's reported profit. She has delayed a major research programme and cut staff training, which lifts profit this year but is expected to reduce the group's competitiveness over the next five years. Which statement best describes the agency issue and the most appropriate response?
The issue is managerial short-termism arising from an incentive linked to one year's profit. The best response is to align pay with long-term shareholder value, using deferred share awards or long-term incentive plans, so the CEO bears the consequences of cutting investment.
- AManagerial short-termism; align rewards with long-term value, for example through deferred shares or long-term incentive plansCorrect
- BManagerial risk aversion alone; replace the CEO with a non-executive director
- CFree-rider problem; increase the audit committee's size
- DStakeholder conflict between employees and customers; introduce a stakeholder map
Explanation
A bonus tied to short-term profit encourages the agent to sacrifice long-term value, a goal incongruence between manager and shareholders. Linking reward to long-term measures such as deferred equity better aligns interests. The other options misdiagnose the problem or do not address the reward structure.
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