Revenue Recognition Case Summary

Bonuses of managers could be paid out in shares which they are obliged to keep for a certain time period, e.g. 5 years. That way the share price on the long term is of importance for the managers and the goal of the shareholders is aligned with the goal of the managers. However, the share price is dependent on much more factors than the performance of just one manager. There is a risk that managers would feel they have little to none influence on the share price and still make risk full decisions. Another possibility would be determining the bonus of a manager on their performance in the long run, e.g. 5 years. A combination of these two bonus

For cash compensation package, tax consideration also decreases the value. Cash bonus is taxed at ordinary tax rate, so Ms. Jameson receive $5000 x (1-0.28) = $3,600 today, and $4,450.82[5] at the next five years. However, there is a risk that Ms. Jameson’s marginal tax rate is changed. For the worst case, tax rate might reach as high as 31%, and this results in the value of $4,265.37[6] at the end of the fifth year.

I would argue that the unlimited upside and downside of a manager’s bonus potential based on a single business unit’s performance causes great chaos because it may be driven by factors beyond one’s control and not necessarily as the result of “true” strong performance. Yes, the upside is great! In 2000, the Dermatology group stands to pocket 200+% of their target bonus due to a competitive exit. However, Dermatology’s favorable EVA was driven by unsustainable share gains, a fluke in the market.

Compensation systems can take on many forms, all of which have positives and negatives related to it. However, certain components are noted to be determinants of solid compensation plans. One agreement of a solid compensation system is the use of incentives. “Clearly a successful companies set objectives that will provide incentives to increase profitability” (Needles & Powers, 2011). Incentive bonuses should be measures that the company finds important to long-term growth. According to Needles & Powers (2011) the most successful companies long term focused on profitability measures. For large for-profit firms, compensation programs should offer stock options. The interweaving between the market value of a company’s stock and company’s performance both motivate and increase compensation to employees As the market value of the stock goes up, the difference between the option price and the market price grows, which increases the amount of compensation” (Needles & Powers, 2011). Conclusively, a compensation plan should serve all stakeholders, be simple, group employees properly, reflect company culture and values, and be flexible (Davis & Hardy, 1999; The Basics of a Compensation Program).

The second approach is having a management team whose interests are aligned with shareholders. Executives are subject to stock ownership guidelines that require them to hold specified multiples of salary in target stock. Incentive compensation opportunities are based on goal levels of performance that are approved by independent directors, aligned with Target’s objectives and disclosed to shareholders.

* PBPA - amortization of bonuses because it is just part of the compensation expense

According to Kimmel, Kieso and Waygandt (2011), "the revenue recognition principle requires that companies recognize revenue in the accounting period in which it is earned." Basically, this means that revenues should be recognized (or in other words recorded) on completion of the process of revenue generation i.e. once revenue has been earned. This is as per the accrual basis of accounting. Essentially, revenue recognition derives its significance from its utilization when it comes to the determination of the specific accounting period in which earnings should be recorded.

The bonus system should not only based on meeting and exceeding budgeted profitability, but also based on the evaluation of mystery shoppers on subjective goals, such as good customer service and experience staff, ect. A simple point system can be considered as way of quantifying the managers’ bonus. This way not only can see how well a manager is doing profit wise, but also how good they are doing in other aspects as well.

Having buy-in from key stakeholders is crucial for the success of an incentive pay system. For example, if top management does not support such a program, lower-level managers will place little importance on effectively administering the program. Hence, a lack of top management support often leads to a lack of accountability. (Gordon, Kaswin)

This year’s bonus pay costs will affect profits, due to increases in employment tax and minimum wage rates. If Norman Ride’s executives do not act to correct this problem, Norman Ride faces extreme revenue shortfalls. Also, managers anticipate that

With this in mind, managers receive their bonus based on computed percentages that are also based on food and beverage cost. If the percentage of unsold food and beverages or if damaged products are low, the manager receives a bonus. On the other hand, if the

* Bonus depended on size of bonus pool, hotel profitability, & the regional manager’s assessment of the hotel

* Since management compensation is tied to firm performance, managers are incentivized to keep costs under control and maintain profitability. However, it is important to balance cost-controls with

They are thinking of implement a strategic compensation plan as well as various other options that will allow its organization to focus on its strategic objectives and develop a comprehensive plan, considering base pay, short- and long-term incentives, benefits and growth opportunities. This kind of planning helps ensure that the compensation system will support the organization's long-and short-term objectives without overlap, which would have more than one pay plan driving the same objectives. The ultimate objective of this process is to ensure that the compensation system and other important facets attract and retain the desired employees and that it motivates them to do those things that support the business plan.

That would guarantee that we could also pay any bonus. We would then have a completely hedged, risk-free position.