ACCA Strategic Professional · Advanced Financial Management · Corporate environmental, social, governance (ESG) and ethical issues
Zenith plc's board proposes granting its finance director 600,000 share options with an exercise price equal to today's share price of $5.00, exercisable in three years. Which feature of the design would most directly reduce the risk of rewarding the director for market movements outside her control?
Making vesting depend on share returns beating a peer-group index is best. It strips out general market movements, so the director is rewarded only for outperformance attributable to the company. Discounted strikes, repricing and early exercise weaken the link between pay and performance.
- ASetting the exercise price at a discount to the current market price
- BMaking vesting conditional on the share return exceeding that of a peer-group indexCorrect
- CAllowing the options to be exercised at any time after grant
- DRepricing the options downwards if the share price falls
Explanation
Relative performance conditions filter out general market movements, so the reward reflects company-specific performance. A discounted exercise price and repricing both reward the director regardless of performance, and immediate exercisability encourages short-termism.
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