Financial Risk Manager Part 1

Explanation

Correct Answer: B

The company's compensation structure that ties substantial bonuses to short-term revenue growth and market share gains creates incentives for managers to take on excessive risks. Here's why:

Key Analysis:

• Aggressive Growth Strategy: GlobalTech operates in a rapidly evolving technology sector with emphasis on innovation and market expansion
• High-Risk Investments: Significant investments in R&D and entry into untested markets inherently involve substantial risk
• Compensation Misalignment: The executive compensation structure rewards short-term performance metrics (revenue growth, market share gains) without apparent consideration for long-term sustainability or risk management

Risk Management Implications:

• Moral Hazard: Managers may be incentivized to pursue risky projects that promise short-term gains but could jeopardize long-term stability
• Risk Appetite Misalignment: While the business strategy is aggressive, the compensation structure amplifies risk-taking behavior beyond what might be appropriate
• Governance Concern: This creates a classic agency problem where executive interests (bonus maximization) may not align with shareholder interests (long-term value creation)

Why Other Options Are Incorrect:

• Option A: The risk appetite is NOT well-aligned because the compensation structure creates perverse incentives for excessive risk-taking
• Option C: The risk appetite is not too conservative; in fact, the combination of aggressive strategy and short-term incentives likely makes it too aggressive

This scenario represents a common risk management challenge where compensation structures can undermine prudent risk governance.