Problem:
The executive officers of coach corporation have a performance based compensation plan. The performance criteria of this plan is linked to growth in earnings per share. When annual EPS growth is 12%, the Coach executives earn 100% of the shares; If growth is 16%, they earn 125%. If EPS growth is lower than 8%, the executives receive no additional compensation.
In 2006, Joanna Becker, the controller of Coach, reviews year e d estimates of bad debt expense and warranty expense. She calculates the EPS growth at 15%. Peter Reiser, a member of the executive group, remarks over lunch one day that the estimate of bad debt expense might be decreased, increasing EPS growth to 16.1% Becker is not sure she should do this because se believes that the current estimate of bad debts is sound. On the other hand, she recognizes that a great deal of subjectivity is involved in the computation.
1) What, if any, is the ethical dilemma for Becker?
2) Should Becker's knowledge of the compensation plan be a factor that influences her estimate?
3) How should Becker respond to Reiser's request?
4) Do you think that the company might not want to generate EPS growth much above 16%? Why?