Many publicly held corporations include a performance basedcomponent as part of their executive compensation package. Forexample, a CEO may receive a bonus if the stock price is higherthan a stated amount at the end of the year. Should all largecorporate executives be compensated based on their performance?What are the pros and cons? How does performance based pay alignwith shareholder interests?

OneClass: Many publicly held corporations include a performance basedcomponent as part of their execu...

I need to be able to create a context, physical, and logical DFD. I think I can figure out how to draw these diagrams once I have the narrative simplified, but I am having a lot of trouble figuring out how to disect this narrative. It would be extrememly helpful to just break this down into the activities being completed and the entities that are completing them.

SprintyPrint pays a year-end bonus to its top three executives (CEO, CFO, COO). The bonus is based on the companyâs financial performance for the year. No other employees in the company receive any form of bonus compensation. The bonus plans for each of the top executives are approved by the Compensation Committee of the Board of Directors each year. For the past 10 years, the basic structure of the bonus compensation scheme has remained the same; however, percentages and thresholds frequently change from year to year and vary based on the executive.

The bonus compensation scheme is a tiered system where executivesâ bonus compensation depends on the tier in which companyâs financial performance falls. The bonus structure incentivizes executives by providing increasingly higher bonuses for achieving improvement over the prior yearâs performance. The following is an example of the basic bonus structure for the CEO:

Tier 1: The bonus is equal to 20% of the CEOâs annual salary if the companyâs Gross Profit increases from the prior year by between 1.00% and 1.99%.

Tier 2: The bonus is equal to 25% of the CEOâs annual salary if the companyâs Gross Profit increases from the prior year by between 2.00% and 3.99%.

Tier 3: The bonus is equal to 50% of the CEOâs annual salary if the companyâs Gross Profit increases from the prior year by between 4.00% and 4.99%

Tier 4: The bonus is equal to 50% of the CEOâs annual salary PLUS 0.1% of Gross Profit if the companyâs Gross Profit increases from the prior year by at least 5%.

Calculations required to prepare the bonus accrual entry are performed in an Excel spreadsheet. The Assistant Controller (Jane Roberts) maintains the spreadsheet and updates it each year with the assistance of the Payroll Department. Jane brings the spreadsheet to the Payroll Department Head (Carolyn Baxter) on a USB drive (the file is not emailed due to its sensitive/confidential nature). Using payroll records, Carolyn modifies the spreadsheet to update the current salaries for each of the 3 executives. When she is done, she saves the file and returns it to Jane on a USB drive.

Next, Jane downloads year-end General Ledger information necessary to calculate Gross Profit for the current year and prior year. Then Jane inserts the downloaded data into her spreadsheet and inputs formulas to calculate the Gross Profit percentage change from prior year to current year.

Finally, Jane obtains the Compensation Committeeâs report from the Board of Directors. The report shows the approved bonus compensation plans for each of the three executives. Using those plans and her calculations of financial performance change from the prior year to the current year, Jane updates the formulas and percentages within the spreadsheet to calculate the total amount of bonus compensation that should be paid to the three executives.

The bottom of the spreadsheet shows the journal entry that should be made based on the spreadsheet calculations. For example:

Dr. Bonus Expense $XX,XXX

Cr. Bonus Payable $XX,XXX

Jane prints the required journal entry and brings the print-out to the Staff Accountant (Derek Abraham) who enters the journal entry into the General Ledger system.

Jane then provides the Excel spreadsheet showing the journal entry to the Controller (Marissa McDonald) for review. Jane also gives Marissa the supporting documentation for the spreadsheet (i.e., Compensation Committee approved/signed report showing bonus and system downloads on performance in the prior and current year). If Marissa finds any errors in her review, she requires Jane to fix the problems, and then Derek must make a correcting journal entry.

Finally, once Marissa reviews and approves the spreadsheet and journal entry, Jane gives Carolyn Baxter (Payroll Department Head) the spreadsheet so that she can prepare to pay the executives in the next payment cycle.

peachtermite72

Smaller Corporation has been in operation for several years. Each year, around the holidays, Smaller gives a cash bonus to each of its employees and records the bonuses as compensation expense. Smaller has reached the point at which it is now making a reasonable return on its shareholders' equity. At the end of the current year, the company president is considering establishing a compensatory share option plan for Smaller's key executives, instead of paying cash bonuses to any of its employees. At this time, the market price and the planned option (exercise) price of the company's common stock are the same. The plan would allocate a specified number of options to each executive based on the executive's level within the company and meeting Smaller's targeted income goals. The service period would be 3 years and the options would have to be exercised within 10 years.

You are the controller for Smaller and one of the key executives who would participate in the plan. You also already own a substantial number of shares of Smaller common stock. The company president comes to you for advice about this plan and says, âIf Smaller establishes this plan, it will work out for all of us. It looks like the plan is pretty valuable, since an option pricing model shows a high fair value for each option. The corporation will be saving cash because it won't have to pay bonuses to either the executives or the other employees. But executives will manage better because their share options will depend on meeting the company's targeted income. Because the market price and the option price are the same, there won't be any compensation cost or expense related to this plan. Furthermore, since no bonuses would be paid to any employees, the corporation will decrease its compensation expense. This will increase its net income and earnings per share compared to last year, as well as its return on shareholders' equity. So the stock value will go up. This seems like a win-win situation for everyone. Am I right on this?â Do you think Smaller should adopt this compensatory share option plan?

Required:

From financial reporting and ethical perspectives, how would you reply to the president?

greenbear620

Smaller Corporation has been in operation for several years. Each year, around the holidays, Smaller gives a cash bonus to each of its employees and records the bonuses as compensation expense. Smaller has reached the point at which it is now making a reasonable return on its shareholders' equity. At the end of the current year, the company president is considering establishing a compensatory share option plan for Smaller's key executives, instead of paying cash bonuses to any of its employees. At this time, the market price and the planned option (exercise) price of the company's common stock are the same. The plan would allocate a specified number of options to each executive based on the executive's level within the company and meeting Smaller's targeted income goals. The service period would be 3 years and the options would have to be exercised within 10 years.

You are the controller for Smaller and one of the key executives who would participate in the plan. You also already own a substantial number of shares of Smaller common stock. The company president comes to you for advice about this plan and says, âIf Smaller establishes this plan, it will work out for all of us. It looks like the plan is pretty valuable, since an option pricing model shows a high fair value for each option. The corporation will be saving cash because it won't have to pay bonuses to either the executives or the other employees. But executives will manage better because their share options will depend on meeting the company's targeted income. Because the market price and the option price are the same, there won't be any compensation cost or expense related to this plan. Furthermore, since no bonuses would be paid to any employees, the corporation will decrease its compensation expense. This will increase its net income and earnings per share compared to last year, as well as its return on shareholders' equity. So the stock value will go up. This seems like a win-win situation for everyone. Am I right on this?â Do you think Smaller should adopt this compensatory share option plan?

Required:

From financial reporting and ethical perspectives, how would you reply to the president?

coffeegnat771

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