ACCA Strategic Professional · Advanced Financial Management · The role and responsibility of senior financial executive/advisor
Which of the following is the most likely example of a mechanism that aligns the interests of managers with those of shareholders by linking managers' rewards to the share price?
An executive share option scheme with vesting conditions tied to total shareholder return aligns managers with shareholders, because the managers' reward rises only when shareholder wealth rises. Fixed salaries and board structure rules do not link pay to the share price.
- AA fixed annual salary set at the industry average
- BAn executive share option scheme with vesting conditions tied to total shareholder returnCorrect
- CA rule that all directors must retire after nine years
- DA requirement for the audit committee to have a majority of non-executive directors
Explanation
Share options with performance conditions tied to TSR make managers' pay depend on shareholder wealth creation, reducing goal incongruence. A fixed salary is not performance-linked, and the other two are governance structure measures rather than reward alignment.
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