1. The company’s bonus plan for top executives follows. One way Krispy Kreme executives can achieve their earnings growth target is to open new stores as fast as possible. Explain why this might alarm shareholders.
Krispy Kreme’s bonus plan 2. Describe how Krispy Kreme’s executive bonus plan might lead to accounting abuses at the company.
For fiscal 2003, bonuses for all executive officers were contingent upon meeting or exceeding targets for two performance measures: (1) a percentage increase in earnings per share of common stock; and (2) a percentage return on revenues as measured by dividing earnings before interest and taxes (EBIT) by total Krispy Kreme revenues. Both targets were met or exceeded for fiscal 2003 though not to the extent they were met or exceeded in fiscal 2002 or fiscal 2001.