MANAGEMENT ACCOUNTING - Solutions Manual

CHAPTER 26
EXECUTIVE PERFORMANCE MEASURES
AND COMPENSATION
I. Questions
1. Incentive compensation is a monetary reward that is based on measured
performance. Organizations where employees have been given the
responsibility to make decisions are best suited for incentive compensation
systems.
2. The four guidelines are: fairness participation basic wage level and
independent wage policy.
!airness deals with the ratio of salaries of the highest paid to lowest paid
employees.
"articipation states that all employees should be included in a
compensation plan. #lthough they do not need to be included in the same
one.
$asic wage level states that a market wage should be paid and incentive
compensation should not be used to ad%ust the market wage downward.
Independent wage policy states that the incentive compensation system for
the most senior levels of the organization should be set by a group that is
independent of senior management.
&. a. based on salary ' easy to administer likely to be considered fair and
to the e(tent that salary reflects the relative ability to contribute to
results is based on contribution)
based on e*ual share ' easy to administer likely to be considered fair
and reflects how people often divide up rewards when left to their own
devices)
based on position ' same as based on salary)
based on individual performance ' ties reward most closely to
performance and likely to have the highest motivational impact.
b. based on salary ' may convince lower level employees that they have
little to contribute does not necessarily reflect contributions)
26-1
Ca!t"# 26 Executive Performance Measures and Compensation
based on e*ual share ' may have little motivational effect may lead to
feeling of ine*uity if some people contribute nothing)
based on position ' same as based on salary)
based on individual performance ' may be difficult and costly to
administer may lead to arguments about interpreting the performance
measure.
+. # cash bonus is a cash reward tied to measured performance. # cash
bonus is a bonus that is best related to activities oriented to short,run
performance that should be rewarded immediately to provide a
reinforcement effect. -ash bonuses are best tied to measures of achieved
operating performance such as *uality improvement sales increases and
success at short,run cost control.
"rofit,sharing is a cash bonus incentive compensation plan where the total
of all cash bonuses paid to all employees is determined by a formula
involving the organization.s or an organization unit.s reported profit.
"rofit,sharing is used to focus organization members on team activities to
improve the organization.s short,term performance.
/ain,sharing is a cash bonus incentive compensation plan where the total
of all cash bonuses paid to all employees is determined by a formula
involving cost performance 0on materials or labor that the group is
deemed able to control1 relative to some standard. /ain sharing is best
used when there is a visible and agreed performance standard and the
employees can work as a group to improve performance relative to that
standard.
# stock option plan is a process where employees deemed to be able to
affect the value of an organization.s shares are given the option to
purchase those shares at a specified price which is usually higher than the
share price at the time the option is issued. 2tock options are best used to
focus attention of senior people who can affect the organization.s long,
run performance by their decisions on long,run performance.
II. Problems
P#o$l"% 1
Requirement (a)
26-2
Executive Performance Measures and Compensation Ca!t"# 26
"23333333 ' 03.14 ( "533333331 6 "7233333
"7233333 ( 3.23 6 "14+3333
Therefore "2333333 would be larger.
Requirement (b)
"83333 9 "12333333 ( "2333333 6 "4&&&.&&
P#o$l"% 2
Requirement (a)
"&3333333 ' 03.14 ( ":23333331 6 "1:3+3333
"1:3+3333 ( 3.28 6 "+253333
Therefore "+253333 would be larger.
Requirement (b)
"+3333 9 "13333333 ( "+253333 6 "1:3+3
III. Multiple Choice Questions
1. - 11. - 21. -
2. # 12. $ 22. ;
&. ; 1&. ; 2&. $
+. - 1+. $ 2+. ;
8. $ 18. #
5. ; 15. ;
:. ; 1:. -
4. # 14. $
7. ; 17. $
13. $ 23. $
26-&