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IAI Actuarial Core Principles · Business Finance · Key principles of finance

Which mechanism is primarily designed to align the interests of managers with those of shareholders by linking pay to share value?

Executive stock option plans align managers with shareholders because managers benefit when the share price rises. Covenants protect lenders, audits verify accounts, and ratings assess credit risk, so none of them directly ties managerial reward to share value.

  1. ARestrictive covenants in a loan agreement
  2. BExecutive stock option plansCorrect
  3. CStatutory audit of financial statements
  4. DAppointment of a company secretary
  5. Credit rating of the company's bonds

Explanation

Stock options give managers a payoff that rises with share price, so they share in gains to shareholders. Covenants protect lenders, audits improve reliability of reporting, and ratings inform creditors. None of these directly ties managers' pay to share value.

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