Tom Townsend, president of Townsend Corporation, is considering establishing a compensatory share option plan for the companys top 20 executives. Tom wants to set terms of the plan so that the number of options the executives can exercise increases based on a specified increase in the companys future earnings. Tom wants to make sure that the plan cannot be manipulated but, in addition, it should properly motivate the executives to stay with the company and make it successful. Tom has asked for your advice on establishing the compensatory share option plan. How should the increase in earnings should be specified? Should it be a dollar amount or a percentage change?Should the change in earnings be compared to the companys past results or against industry results?How should the service period of the plan be determined? Finally, explain to Tom how this new compensatory share option plan will affect the companys financial statements.