ACCA · Question 15 · Financial Management Function
Section A
MetroWater Utility is experiencing an agency problem. Directors are rejecting positive NPV projects that have long payback periods because their annual bonuses are tied strictly to short-term Return on Capital Employed (ROCE) targets.
Which of the following changes to the directors' remuneration package would best align their interests with the long-term wealth maximization of the shareholders?
Answer options:
Increasing the fixed base salary and removing all performance-related bonuses.
Replacing the ROCE bonus with Executive Share Options that vest after five years.
Changing the bonus target from ROCE to short-term Earnings Per Share (EPS).
Paying the ROCE bonus in shares rather than cash, but allowing immediate sale.
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