MANAGEMENT ACCOUNTING (VOLUME II) - Solutions Manual

CHAPTER 26
EXECUTIVE PERFORMANCE MEASURES
AND COMPENSATION
I.

Questions
1. Incentive compensation is a monetary reward that is based on measured
performance. Organizations where employees have been given the
responsibility to make decisions are best suited for incentive compensation
systems.
2. The four guidelines are: fairness, participation, basic wage level, and
independent wage policy.
Fairness deals with the ratio of salaries of the highest paid to lowest paid
employees.
Participation states that all employees should be included in a
compensation plan. Although, they do not need to be included in the same
one.
Basic wage level states that a market wage should be paid, and incentive
compensation should not be used to adjust the market wage downward.
Independent wage policy states that the incentive compensation system for
the most senior levels of the organization should be set by a group that is
independent of senior management.
3. a. based on salary easy to administer, likely to be considered fair, and,
to the extent that salary reflects the relative ability to contribute to
results, is based on contribution;
based on equal share easy to administer, likely to be considered fair,
and reflects how people often divide up rewards when left to their own
devices;
based on position same as based on salary;
based on individual performance ties reward most closely to
performance and likely to have the highest motivational impact.
b. based on salary may convince lower level employees that they have
little to contribute, does not necessarily reflect contributions;

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Chapter 26 Executive Performance Measures and Compensation

based on equal share may have little motivational effect, may lead to
feeling of inequity if some people contribute nothing;
based on position same as based on salary;
based on individual performance may be difficult and costly to
administer, may lead to arguments about interpreting the performance
measure.
4. A cash bonus is a cash reward tied to measured performance. A cash
bonus is a bonus that is best related to activities oriented to short-run
performance that should be rewarded immediately to provide a
reinforcement effect. Cash bonuses are best tied to measures of achieved
operating performance such as quality improvement, sales increases, and
success at short-run cost control.
Profit-sharing is a cash bonus incentive compensation plan where the total
of all cash bonuses paid to all employees is determined by a formula
involving the organizations, or an organization units, reported profit.
Profit-sharing is used to focus organization members on team activities to
improve the organizations short-term performance.
Gain-sharing is a cash bonus incentive compensation plan where the total
of all cash bonuses paid to all employees is determined by a formula
involving cost performance (on materials or labor that the group is
deemed able to control) relative to some standard. Gain sharing is best
used when there is a visible and agreed performance standard and the
employees can work as a group to improve performance relative to that
standard.
A stock option plan is a process where employees, deemed to be able to
affect the value of an organizations shares, are given the option to
purchase those shares at a specified price which is usually higher than the
share price at the time the option is issued. Stock options are best used to
focus attention of senior people, who can affect the organizations longrun performance by their decisions, on long-run performance.

II. Problems
Problem 1
Requirement (a)
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Executive Performance Measures and Compensation Chapter 26

P20,000,000 (0.18 x P60,000,000) = P9,200,000

P9,200,000 x 0.20 = P1,840,000
Therefore, P2,000,000 would be larger.
Requirement (b)
P50,000 / P12,000,000 x P2,000,000 = P8,333.33
Problem 2
Requirement (a)
P30,000,000 (0.18 x P72,000,000) = P17,040,000
P17,040,000 x 0.25 = P4,260,000
Therefore, P4,260,000 would be larger.
Requirement (b)
P40,000 / P10,000,000 x P4,260,000 = P17,040
III. Multiple Choice Questions
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

C
A
D
C
B
D
D
A
D
B

11.
12.
13.
14.
15.
16.
17.
18.
19.
20.

C
B
D
B
A
D
C
B
B
B

21.
22.
23.
24.

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C
D
B
D