Reference no: EM133134118

Question - Krispy Kreme's bonus plan - A brief description of Krispy Kreme's annual cash bonus plan for top executives follows.

The Compensation Committee chose consolidated EBITDA [earnings before interest, taxes, depreciation and amortization] and revenue as the performance metrics for fiscal 2012, weighted at 80% and 20%, respectively. Consolidated EBITDA is defined the same way as it is defined in our secured credit facilities. The Compensation Committee assigned three levels of performance for consolidated EBITDA and for Revenue: threshold, target, and maximum.

Source: Krispy Kreme Doughnuts, Inc. 2012 Proxy, edited for brevity.

The disclosure further indicates that eligible recipients would receive 70%, 100%, or 140% of the portion of the target bonus for performance attributable to each performance metric for performance at the threshold, target, and maximum levels, respectively. The bonus for performance that falls between two of those levels would be prorated.

Required -

1. One way Krispy Kreme executives can achieve the revenue target is to open new stores as fast as possible. Explain why this might alarm shareholders.

2. Why might it be important for the bonus plan to use the same EBITDA definition used in Krispy Kreme's "secured credit facilities" (loan agreements)?

3. Describe how Krispy Kreme's executive bonus plan might lead to accounting abuses at the company.