Williams Corporation features a compensation system that offers a bonus above base salary for exceptional performance. Managers of all responsibility centers receive bonus payments if earnings per share is at least 10% larger than the previous year. If the increase in earnings per share is less than 10%, no bonus is paid. As the current year nears its close, it is apparent that the company's poor performance will make it impossible for management to reach the threshold for bonus payments. Under these circumstances, management will have an incentive:
A) To accelerate recognition of revenues from sales that will not be closed until the following year.
B) To further reduce earnings per share by accelerating the recognition of losses and expenses, thereby increasing the likelihood of exceeding the threshold next year.
C) Monitor each other's behaviors in an effort to find ways to improve earnings.
D) To implement new accounting principles such as a change from LIFO to FIFO in order to reduce expenses.

Question

Quizplus · Accepted Answer

Given the bonus structure, management has an incentive to further reduce earnings in the current year if they already know they won't meet the bonus threshold. This could make it easier to achieve a higher earnings per share next year, potentially ensuring they meet the bonus criteria then.

Williams Corporation Features a Compensation System That Offers a Bonus