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Homework answers / question archive / Krispy Kreme's bonus plan: A brief description of Krispy Kreme's annual cash bonus plan for top executives follows
Krispy Kreme's bonus plan: A brief description of Krispy Kreme's annual cash bonus plan for top executives follows.
The Compensation Committee chose consolidated EBITDA [earnings before interest, taxes, depreciation and amortization] and revenue as the performance metrics for fiscal 2012, weighted at 80% and 20%, respectively. Consolidated EBITDA is defined the same way as it is defined in our secured credit facilities. The Compensation Committee assigned three levels of performance for consolidated EBITDA and for Revenue: threshold, target, and maximum.
Source: Krispy Kreme Doughnuts, Inc. 2012 Proxy, edited for brevity.
The disclosure further indicates that eligible recipients would receive 70%, 100%, or 140% of the portion of the target bonus for performance attributable to each performance metric for performance at the threshold, target, and maximum levels, respectively. The bonus for performance that falls between two of those levels would be prorated.
Required:
1. One way Krispy Kreme executives can achieve the revenue target is to open new stores as fast as possible. Explain why this might alarm shareholders.
2. Why might it be important for the bonus plan to use the same EBITDA definition used in Krispy Kreme's "secured credit facilities" (loan agreements)?
3. Describe how Krispy Kreme's executive bonus plan might lead to accounting abuses at the company.
Answer Question-1
Krispy Kreme's management decided to prolong the contract. Krispy Kreme is rumored to be opening brand-new locations. KK made the decision to offer KK doughnuts in the supermarket, and they immediately felt the impact on their respective businesses. When a company launches a new product that generates profits on capital that exceed the cost of capital, stockholders will benefit. Later on, it will display an exact overall worth of the new business, owing to the supervisors who opened the negative net value of the store, which simply confers a negative return on assets that are greater than the cost of capital in the first place.
Answer Question-2
In times of prosperity, income and EBITDA are acknowledged as the primary production metrics. The board of directors decided on three stages of production: origin, purpose, and highest. Since it would be necessary for the supervisor/compensation manager's incentives to exercise the same meaning, it is necessary to practice the same meaning in the reward plan. The strategy described above will reduce the number of incentive disagreements among supervisors.
Answer Question-3
The accounting irregularities involve live performances, such as allowing franchisees to acquire doughnut mix and then supplying it prior to the event taking place. They are intended to take the position of accounting designs, including increased guidelines. Accounting gimmicks are used to provide incentives to supervisors and managers, and they will be reliant on accurate profits in order to be successful.
