A company at least sometimes has the following components of income. This is a recent example: Operating income $100,000 Restructuring costs* <20,000 > Tax expense <30,000 > Net income $50,000 (*cost of closing down brands or segments) Suppose you are on the compensation committee of the board of directors. You might make decisions about how to compensate anticipating that there will be behavioral consequences to your choices.

Your committee can choose to pay the CEO bonuses based on: 1. operating income 2. operating income minus restructuring costs 3. operating income minus tax expense, or 4. operating income minus restructuring costs and tax expense, or 5. something else.

Required: 1. Explain in detail one disadvantage of a pay-for-performance system. 2. Select one of the bases from 1 through 5 above as a bases for CEO pay. What is the consequence of your choice in the sense of what would your choice encourage or discourage? What gets ignored and why should anything be ignored in determining pay (if anything should be ignored, and I'm not saying it should)?