Krispy Kreme's bonus plan (LO 7-32) A brief description of Krispy Kreme's annual cash bonus plan for top executives follows The Compensation Committee chose consolidated EBITDA [earnings before interest, taxes, depreciation and amortization] and revenue as the performance metrics for fiscal 2012, weighted at S0% and 20%, respectively. Consolidated EBITDA is defined the same way as it is defined in our secured credit facilities. The Compensation Committee assigned three levels of performance for consolidated EBITDA and for Revenue: threshold, target, and maximunm Source: Krispy Kreme Doughnuts, Inc. 2012 Proxy, edited for brevity. The disclosure further indicates that eligible recipients would receive 70%, 100%, or 140% of the portion of the target bonus for performance attributable to each performance metric for performance at the threshold, target, and maximum levels, respectively. The bonus for performance that falls between two of those levels would be prorated The following table provides summary balance sheet information for the last several years $ in thousands) Total assets 1/29/2012 2/3/2013 2/2/2014 2/1/2015 $34193S $338,546 S334,943 $352,713 Debt, including current maturities Other liabilities Total equity $27.593 58.229 249,126 S334,948 $25,743 1,993 71.460 265,093 $341,938 $338.546 S 9,687 75,240 267,786 $352,713 69.763 246.432 Total liabilities and equity Required: 1. One way Krispy Kreme executives can achieve the revenue target is to open new stores as fast as possible. Explain why this might alarnm 2. Why might it be important for the bonus plan to use the same EBITDA definition used in Krispy Kreme's "secured credit facilities" (loan 3. Describe how Krispy Kreme's executive bonus plan might lead to accounting abuses at the company shareholders. agreements)? 4. Beginning in fiscal 2014 (the year ended February 1,2015), Krispy Kreme began using pre-tax income instead of EBITDA as a performance metric in its compensation plan. What information in the company's balance sheets suggests its management may have been responding to changing financial incentives when the performance metric changed