Skip to content

ACCA Applied Skills · Financial Management · The nature and purpose of financial management

Which of the following is the most effective way to align the interests of managers with those of shareholders?

Share options that vest only when the share price exceeds a target over several years best align managers with shareholders, because managers' rewards then depend on increasing shareholder wealth over the long term rather than on fixed pay or revenue alone.

  1. APaying managers a fixed salary that is reviewed every five years
  2. BGranting managers share options that vest only if the share price rises above a target level over a multi-year periodCorrect
  3. CPaying managers a bonus based solely on the current year's revenue
  4. DIncreasing the number of executive directors on the board

Explanation

Share options linked to share price performance over several years tie managers' rewards to shareholder wealth and encourage a long-term view. A fixed salary gives no link to performance. A revenue-based bonus can encourage growth at the expense of profit or value. Adding executive directors does not align interests.

Did you get it right without looking?

One question tells you little. A timed set on The nature and purpose of financial management shows your real accuracy, how long you take and where you lose marks.

Practise The nature and purpose of financial managementFree diagnostic mock

More The nature and purpose of financial management questions