Problem:
The top five executives at Marvel Manufacturing are paid annual bonuses based on predetermined earnings goals. These bonuses can be as much as 500% of salary. As a member of the company's compensation committee, you've been asked to comment on the following proposed changes to the annual bonus plan:
Use after-tax income from continuing operations as the earnings performance measure instead of bottom-line net income.
Set performance goals based on return on assets (ROA) rather than on earnings.
Set performance goals-net income or ROA- based on beating the industry average rather than using an absolute performance target.
What are the advantages and disadvantages of each suggested change?