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Ethics of Executive Compensation

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Do you think executives deserve to make around 200 times as much as the average worker? Is it ethical for managers to take large pay increases while laying off employees and when giving them only small raises? Are companies being socially responsible when paying executives premium compensation?

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There really are two sides to this argument. The majority of workers will invariably believe that executives are overpaid. However, on the other side of the argument, we have to look at a few facts. While executive compensation remains high, executives typically have a master's degree (at the minimum), and other forms of advanced training. Many executives are CPA's and some are attorneys. This leads us to two different facts: (1) executives have endured a higher degree of schooling and certifications than the average worker, and (2) executives have accumulated advanced knowledge through their various forms of training. In my company, for instance, we pay executives high. All of our ...

Solution Summary

This solution discusses the ethics involved in executive compensation. A thorough discussion is provided explaining each area regarding compensation issues. Reference are also provided.

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Ethical Issues - Compensation Plan

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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