ACCA Applied Skills · Financial Management · Stakeholders and impact on corporate objectives
Which of the following remuneration arrangements is most likely to align a director's interests with those of shareholders over the long term?
Share options exercisable after several years and tied to share price best align directors with shareholders, because the director only gains when shareholder wealth rises over the long term, discouraging short-term profit manipulation or growth for its own sake.
- AA fixed salary set at the industry average
- BA bonus based on this year's reported profit before tax
- CA share option scheme exercisable only after several years and linked to share price performanceCorrect
- DA bonus based on increasing the company's total asset base
Explanation
Long-dated share options link the director's reward to share price, and so to shareholder wealth, over several years. A profit-based annual bonus encourages short-termism and accounting manipulation. A fixed salary gives no link to performance, and rewarding asset growth may encourage empire building.
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