Puppy paws sells pet supplies to pet parents. It is a family owned business headed by John Doe who has hired an external CEO (Joshua Bones) to manage ongoing operations. John set a "stretch target" of a 15% increase in profit for 2020 (total target profit of $1,374,250 = 1.15 x $1,195,000 profit in 2019) to incentivize growth. He also structured Joshua's compensation with a base pay of $250,000 and incentive pay equal to 10% of profit between $1,195,000 and $1,374,250 plus 20% of all profits greater than the stretch target of $1,374,250. To his surprise, profit in 2020 was $2,000,000, giving Joshua Bones a total compensation of $393,075 for the year. After analyzing the company's financial statements to learn what strategies Bones used to generate the strong profits shown in 2020, here is what John found:

Bones generated additional sales by changing the credit terms from payment due 30 days after sale to payment due 6 months after the sale (interest free) for all approved, creditworthy customers. This action increased Accounts Receivable significantly from the prior year.

The company had been operating at approximately 70 percent of available capacity. Bones greatly increased production to meet the demand generated by allowing customers to pay in 6 months. He also ordered an additional buildup in inventory. According to Bones, the buildup was needed to deal with large and rush orders. Madeline suspects that the buildup was an effort to reduce unit costs (the more units produced, the lower the cost per unit because some manufacturing costs are fixed).

Bones reduced R&D expenditures.

• Bones paid off all company debt reducing interest expense.

1. Explain why each of the 4 actions Bones took is motivated by the existing compensation plan
2. Discuss some potential implications of each of the 4 actions on the firm's current and future performance
3. Suppose that Bones' compensation had been linked to EVA. Would that have mitigated and/or prevented any of the 4 actions that Bones took?
4. Now suppose that instead of the compensation scheme given in the problem, John decided to use a Balanced Scorecard to manage performance in future years. He identified the two major goals listed below, and underlying objectives for each:

• Maintain strong financial health.
  • Keep sufficient cash reserves to assure financial stability.
  • Achieve consistent growth in sales and income.
• Provide excellent service to customers.
  • Provide products that meet the needs of customers.
  • Meet customer needs on a timely basis.
  • Meet customer quality requirements.

For each of the five objectives above, propose and explain one measure that could be used in thePuppy Paws Balanced Scorecard to assess whether the objective is being achieved