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ACCA Strategic Professional · Advanced Financial Management · Strategic business and financial planning for multinational organisations

Zeta plc's chief executive is paid a bonus based solely on this year's earnings per share. Which governance risk does this structure most directly create for long-term financial strategy?

The main risk is short-termism. Because the bonus depends only on current-year EPS, the chief executive is motivated to cut discretionary spending or repurchase shares to lift EPS, even where this harms long-term shareholder value. Linking rewards to multi-year value measures would reduce this agency problem.

  1. AShort-termism, as the executive may favour earnings-boosting actions such as cutting R&D or buying back shares over long-term value creationCorrect
  2. BExcessive reliance on equity finance, because EPS bonuses penalise gearing
  3. CReduced agency conflict, because management and shareholders now share identical goals
  4. DA breach of the requirement that executives hold no shares

Explanation

A single-year EPS metric rewards actions that lift short-run EPS, such as cutting discretionary spending or buying back shares, even if they reduce long-term value. This widens rather than narrows the agency conflict. Gearing does not penalise EPS, and no rule bars executive shareholding.

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