Executive compensation is often based on meeting certain targets for revenue growth, earnings, earnings per share, return on assets, or other performance measures. But what if performance is not living up to expectations? Some companies are simply changing the targets. For instance, Sun Microsystems’

proxy as quoted in The Wall Street Journal states that “due to economic challenges experienced during the last fiscal year, our earnings per share and revenues are significantly below plan. As such, the Bonus Plan was amended to reduce the target bonus to 50% of the original plan and base the target bonus solely on the third and fourth quarters.”11 Sun Microsystems was not alone.

Other companies, such as AT&T Wireless, Estee Lauder, and UST, also lowered targets for executive bonuses. Do you think it is acceptable to change the bonus targets for executives during the year if the year turns out to be not as successful as planned? What if an unexpected negative event like 9/11 happens? What are three standards of comparison? Which of these might justify changing the bonus targets during the year?

Internet Case Using Investors’ Services