Discussion Case 6-1

Should We Implement an Earnings-Based Bonus Plan?

Benjamin Vincent is the CFO of Annie Company. The companys CEO has asked Benjamin to design an incentive scheme that will motivate employees to focus more on the companys bottom-line results. Benjamin is considering a plan that will give each employee a bonus based on the companys reported net income for the year. Each employee will receive an amount equal to the companys earnings per share multiplied by either 10,000 times, 50,000 times, or 200,000 times, depending on the employees level in the company. Last year, Annie Companys earnings per share was $1.32. Benjamin has asked you for your advice. In particular, he wants you to explain the disadvantages of having an earnings-based bonus system.

Discussion Case 6-2

We Only Need Another $100,000!

Chris Titera is the CFO for Dallas Company. It is January 10, and Chris has just finished compiling the preliminary financial results for the most recent fiscal year, which ended on December 31. The preliminary results indicate that Dallas lost $100,000 during the year. Dallas is a large company (with assets in excess of $1 billion), so the $100,000 loss is essentially the same as zero. However, the board of directors thinks that it conveys a very negative image for Dallas Company to report a loss for the year, even if the loss amount is very small. As a result, it has instructed Chris to look at the numbers again and see if he can turn this loss into a profit. What things can Chris do, as the CFO, to turn this loss into a profit? What concerns should Chris have?

Discussion Case 6-3

Are Financial Analysts Rational?

Stella Valerio is a financial analyst who follows Olsen Company and other companies in the same industry. You have just done a historical analysis of Stellas earnings forecasts for Olsen Company and noticed that its earnings have exceeded Stellas forecasted amount for 27 quarters in a row. You are wondering whether this is just a coincidence, whether Stella is an exceptionally bad forecaster, or whether other factors may be at work here.