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    Ethical Issues of Compensation Plan

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    The executive officers of coach 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 Coach 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 2006, Joanna Becker, the controller of Coach, reviews year e d estimates of bad debt expense and warranty expense. She calculates the EPS growth at 15%. Peter Reiser, 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% Becker is not sure she should do this because se 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.

    (a) What, if any, is the ethical dilemma for Becker?
    (b) Should Becker's knowledge of the compensation plan be a factor that influences her estimate?
    (c) How should Becker respond to Reiser's request?
    (d) Do you think that the company might not want to generate EPS growth much above 16%? Why?

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    Solution Preview

    (a) What, if any, is the ethical dilemma for Becker?

    The ethical dilemma is between the executive officers and the shareholders of the firm. If Becker changes the bad debt expense, then the executive officers would get a higher bonus but that higher amount would be paid by the shareholders of the firm. Becker would be reporting to the executive officers of the firm, but as a controller she has the responsibility towards the shareholders ...

    Solution Summary

    The solution explains the ethical issue relating to a compensation plan and the ethical dilemma faced by Becker, as well as information on how she should respond to Reiser. An answer as to the company generating growth above 16% is also given.