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ACCA Strategic Professional · Advanced Performance Management · Performance and reward

Zenara plc pays its finance director an annual cash bonus equal to 5% of operating profit. The director has recently delayed essential equipment maintenance and cut training spend in the final quarter, lifting profit this year. Which feature of the bonus scheme most directly explains this behaviour?

The behaviour is explained by the bonus being linked to short-term annual operating profit. Cutting maintenance and training raises current profit and therefore the bonus, while harming long-term value, so the scheme encourages short-termism rather than sustainable performance.

  1. AThe bonus is linked to a short-term accounting profit measure, encouraging short-termismCorrect
  2. BThe bonus is paid in cash rather than shares, so it lacks any motivational effect
  3. CThe bonus is capped, so the director has no incentive to improve performance
  4. DThe bonus is based on a relative measure, so it rewards performance against competitors

Explanation

A bonus tied to annual operating profit rewards cutting discretionary costs such as maintenance and training, which boosts current profit at the expense of long-term value. The form of payment (cash) is not the cause, and nothing in the scenario indicates a cap or relative measure.

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