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Krispy Kreme's annual cash bonus plan for top executives

1. A brief description of Krispy Kreme's annual cash bonus plan for top executives follows. 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 abused at the company?

Source: Krispy Kreme Doughnuts, Inc. 2010 proxy:
" The compensation Committee chose consolidated EBITDA (earnings before interest, taxes, depreciation and amortization) and revenue as the performance metrics for fiscal 2011, 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: revenues for fiscal 2011 do not exceed those from fiscal 2010, the executives will not be eligible to receive 20% of the target cash bonus amount.

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1. A brief description of Krispy Kreme's annual cash bonus plan for top executives follows. 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.

Giving a manager the incentive to open many stores diverts attention from whether the stores are successful once they are open. It does not give them a reason to be careful in the store selection and may leave the company with many fixed costs to run stores that have been poorly selected and not profitable. This is like giving a college admission officer a bonus for admitted students. Heck, he'll just lower the bar ...

Solution Summary

Your tutorial is 520 words and gives examples of abuses to increase bonuses, explains why they might use the same metric as the loan documents and indicates why rewarding store openings might lead to a bad outcome.

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