Discuss Ethics and Performance-Based Compensation
The executive officers of the Fancy Expensive Wine Corporation have a performance-based compensation plan. The performance criteria of this plan is linked to growth in earnings per share. When annual EPS growth is 12%, the Fancy Expensive Wine Corporation executives earn 100% of the shares; if growth is 16%, they earn 125%. If EPS growth is lower than 8%, the executives receive no additional compensation. In 2003, Nancy Noseup, the controller of the Fancy Expensive Wine Corporation, reviews year-end estimates of bad debt expense and warranty expense. She calculates the EPS growth at 15%. Peter Peters, a member of the executive group, remarks over lunch one day that the estimate of bad debt expense might be decreased, increasing EPS growth to 16.1%. Nancy Noseup is not sure she should do this because she believes that the current estimate of bad debts is sound. On the other hand, she recognizes that a great deal of subjectivity is involved in the
computation.
