Accounting Compensation And Strategy Questions Homework Help
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Corona is a privately held high-end luxury retailer that operates stores in the wealthiest cities and suburbs in the United States. The corporate headquarters is located in New York City. The company has a long history of profitability and a strong national image as the pinnacle of luxury. However, in the past two years Corona’s profitability has begun to drop off and many of the top executives fear that the company’s most important asset, its brand image, might come into jeopardy if it cannot regain its past profitability. Bernard Starnes, Corona’s long-time CEO, wonders if the company’s aged compensation plan might be at least partially responsible for Corona’s tough times. He remembers a time when the company was rapidly expanding by creating several new divisions and aggressively promoting its brand image. It seemed like he was attending a new store opening every week. During those times divisional managers worked hard for their bonuses. It was almost as if there was a competition between divisions as to which could beat their sales plans by the widest margin because that would mean the largest bonuses. This was due to the fact that a significant portion of the managers’ compensation
was tied to their bonuses. Now the company is not expanding as rapidly and its focus has shifted to promoting current products and growing same-store sales. Furthermore, Mr. Starnes has noticed several troubling trends within the company. First, he has noticed a steady decline in cross-divisional cooperation and coordination. Second, there have been several recent occasions where Mr. Starnes had to become personally involved in situations where divisional managers were making decisions that were beneficial to their individual divisions but not strategically aligned with the firm as a whole. Finally, management turnover is becoming somewhat of a problem, especially right after bonuses are awarded at the end of each fiscal year.
Suggest a new compensation plan that would help solve the problems Mr. Starnes has noticed at Corona. Show how your answer effectively addresses the strategic goals of the company.
2. Ways to Create Shareholder Value
A leading author in accounting and finance, Alfred Rappaport focuses in his work on the importance of a firm’s management continually taking steps that increase shareholder value. In a recent article he set out his “Ten Ways to Create Shareholder Value:”
1. Do not manage earnings or provide earnings guidance; do not focus on earnings as it reflect neither the company’s value or the change in value over the reporting period.
2. Make the strategic decisions that maximize expected value, even at the expense of lowering nearterm earnings; this may mean divesting units that do not contribute to the company’s long-term strategic goals though they do contribute to current profits.
3. Make acquisitions that maximize expected value, even at the expense of lowering near-term earnings; do not make acquisitions that improve only current earnings per share, but those that are expected to contribute to long-term value.
4. Carry only assets that maximize value; continually review assets and be prepared to sell units, brands, real estate, or other assets that can be sold for a price that is greater than their value to the company.
5. Return cash to shareholders when there are no credible value-creating opportunities to invest in the business; through cash dividends and stock buybacks.
6. Reward CEOs and other senior executives for delivering superior long-term returns.
7. Reward operating unit managers for adding superior multiyear value.
8. Reward middle managers and frontline employees for delivering superior performance on the key value drivers that they influence directly.
9. Require senior executives to bear risks of ownership just as shareholders do.
10. Provide investors with value relevant information.
A key topic in management accounting is the valuation of a company. Focusing on public companies, Rappaport explains how to increase business value to shareholders. Consider each of his 10 recommendations and show how they can be related to cost management, management compensation, and
3. Compensation at Nonpublic Companies
The executive compensation programs of the largest public companies often include the types of equity-based compensation such as stock options and performance shares as described in this chapter. Smaller nonpublic companies often have the same types of strategic goals and want to provide the same types of compensation plans as do the larger public companies but do not have the equity types of compensation to offer since the firms do not have publicly-traded stock.
1. What are the advantages of equity-based compensation such as stock options and performance shares?
2. What types of compensation can nonpublic companies offer that would provide the desired incentives that equity-based compensation offers?
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4. Compensation for Operational-Level Managers and Employees
Retailers and restaurants such as McDonald’s and Wal-Mart have a very large number of stores and store managers. These two firms have been very successful and have continued to grow during the 2008–2009 recession even though
many other firms have suffered. McDonald’s and Wal-Mart’s success depends to a great deal on the energy, hard work, and effectiveness of these store managers. It is critical for these two firms and for firms in these two industries to provide effective compensation plans for the store managers.
What type of compensation plan would you develop for managers of stores such as Wal-Mart and McDonald’s, and why?
5. Compensation in Tough Economic Times
During an economic recession companies are under pressure to reduce costs, and a significant part of total cost for most companies is salaries and wages, including both executive compensation and employee compensation.
Review the types of compensation we have covered in this chapter and explain which types of compensation you would reduce if needed to help a company through difficult economic times.
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