ACCA Applied Skills · Financial Management · The nature and purpose of financial management
Which of the following remuneration arrangements for directors is MOST likely to help align directors' interests with those of shareholders and reduce the agency problem?
A share option scheme with a multi-year vesting period best aligns directors with shareholders, because directors gain only if the share price rises over the long term. Fixed salaries, revenue-only bonuses and guaranteed severance do not tie rewards to long-term shareholder wealth.
- AA high fixed salary payable regardless of company performance
- BA share option scheme with options exercisable only after several yearsCorrect
- CA bonus based solely on the current year's revenue growth
- DA guaranteed severance payment on dismissal for poor performance
Explanation
Share options exercisable after several years link directors' rewards to long-term share price, which reflects shareholder wealth. A fixed salary gives no link to performance, and a revenue-only annual bonus encourages short-termism and ignoring profitability. Guaranteed severance rewards failure.
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