As noted in P18-5, Slough Estates is a U.K.-based property developer that prepares its profit and loss statement and balance sheet using current cost accounting. Slough Estates’ senior executive compensation is governed by the remuneration committee made up of nonexecutive directors of the company. This committee is charged with establishing performance criteria under which executives are awarded bonuses and stock options. The annual report discloses that the two performance criteria selected by committee are diluted earnings per share and net assets per share.
Required:
1. Describe the role that property revaluations play in setting executive compensation at Slough Estates.
2. Assume that Slough’s compensation committee has assigned you to design an executive bonus scheme based on asset revaluations. What factors would you consider in setting your policy? (Hint: You should certainly consider who would perform the revaluations, what assets would be included, and who would control the timing of such revaluations.)