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ACCA Strategic Professional · Advanced Performance Management · Financial performance measurement

Vantor Plc links executive bonuses to annual free cash flow. Which behaviour is the most likely unintended consequence of this reward design?

The most likely unintended consequence is deferring capital expenditure and stretching payables. Both actions raise annual free cash flow immediately, but cutting investment can damage long-term value and supplier relations, which is a short-termism risk of using a single cash measure for bonuses.

  1. ADeferring capital expenditure and stretching payables to boost short-term free cash flowCorrect
  2. BOverinvesting in new projects with positive net present values
  3. CIncreasing credit sales to raise reported revenue
  4. DCapitalising development costs to raise reported profit

Explanation

Free cash flow rises when capex is cut or payments are delayed, so managers may harm long-term value by underinvesting. Capitalising costs boosts profit but does not raise cash flow. Taking positive NPV projects is desirable behaviour, and extending credit sales hurts cash in the short term.

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