What are some of the pitfalls of a company basing a manager’s or CEO’s compensation on the company’s earnings?
Jason Archer is the CEO of JCPenney (a U.S. retailer). Because Jason’s bonus is based on the company’s earnings, he has directed the controller to use FIFO as the inventory costing method. Jason did not tell the controller his real reason for the directive; instead, he stated that he thought FIFO better reflected the actual flow of inventory costs.
Please review the following links and then answer the questions.
http://www.journalofaccountancy.com/Issues/2002/Jun/UseBest PracticesInExecutiveCompensationPlans.htm
http://www.ur.umich.edu/0304/Jan19_04/10.shtml
http://www.investopedia.com/articles/stocks/07/executive_ compensation.asp
http://ir.jcpenney.com/phoenix.zhtml?c=70528&p=irol-irHome
http://www.searsholdings.com/invest/financial_info.htm
Discussion Question
Jason’s decision to select FIFO appropriate? Is it ethical? Is Jason wrong if this will help the company and also benefit him too?
What are some of the pitfalls of a company basing a manager’s or CEO’s compensation on the company’s earnings?
Using the links provided for JCPenney and Sears (a U.S. retailer), determine the inventory turnover ratio for the companies. What does this ratio tell you about these companies? How do the companies compare?
Using the links provided for JCPenney and Sears, calculate the number of days in inventory for the companies. What does this ratio tell you about these companies? How do the companies compare?
