(Ethica l Issues—Compensatio n Plan ) The executive officers of Rouse Corporation have a

(Ethica l Issues—Compensatio n Plan ) The executive officers of Rouse Corporation have a performance-based compensation plan. The performance criteria of this plan is linked to growth in earn- ings per share. When annual EPS growth is 12%, the Rouse executives earn 100% of the shares; if growth is

16%, they earn 125%. If EPS g r owth is lower than 8%, the executives r eceive no additional compensation.

I n 2014 , Joa n Devers , th e cont r olle r o f Rouse , r eview s yea r -en d estimate s o f ba d deb t expens e and

warrant y expense . Sh e calculate s th e EP S g r owt h a t 15% . Kur t Adkins , a membe r o f th e executiv e g r oup,

r emark s ove r lunc h on e da y tha t th e estimat e o f ba d deb t expens e migh t b e dec r eased , inc r easin g EPS

g r owt h t o 16.1% . Dever s i s no t su r e sh e shoul d d o thi s becaus e sh e believe s tha t th e cur r en t estimat e of

ba d debt s i s sound . O n th e othe r hand , sh e r ecognize s tha t a g r ea t dea l o f subjectivit y i s involve d i n the

computation.

Instructions

Answer the following questions.

(a) What, if any, is the ethical dilemma for Devers?

(b) Should Devers’s knowledge of the compensation plan be a factor that influences her estimate?

(c) How should Devers r espond to Adkins’s r equest?

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