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ACCA Applied Skills · Financial Management · Financial objectives and relationship with corporate strategy

Which of the following is the most likely weakness of a remuneration scheme that rewards managers with bonuses based solely on current-year earnings per share (EPS)?

The main weakness is short-termism. Because the bonus depends on current-year EPS, managers can boost it by cutting discretionary long-term spending such as research or maintenance, which may reduce the company's long-term value and shareholder wealth.

  1. AIt encourages managers to cut long-term investment such as research spending to boost short-term EPSCorrect
  2. BIt makes managers ignore short-term profit entirely
  3. CIt prevents managers from owning any shares in the company
  4. DIt guarantees managers' goals align fully with long-term shareholder wealth

Explanation

EPS is a single-year accounting measure, so managers can raise it by deferring discretionary spending such as R&D or maintenance, harming long-term value. The scheme does not ignore short-term profit, and goal congruence is not guaranteed.

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