Question

Case 8-1 Krispy Kreme's bonus plan (LO 8-3)

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. Krispy Kreme was a public company before being acquired by JAB Holding Company in 2016.

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.

The following table provides summary balance sheet information for several years.

($ in thousands)	1/29/2012			2/3/2013			2/2/2014			2/1/2015
Total assets	$	334,948		$	341,938		$	338,546		$	352,713
Debt, including current maturities	$	27,593		$	25,743		$	1,993		$	9,687
Other liabilities		58,229			69,763			71,460			75,240
Total equity		249,126			246,432			265,093			267,786
Total liabilities and equity	$	334,948		$	341,938		$	338,546		$	352,713

Required:

1. One way Krispy Kreme executives could achieve the revenue target is to open new stores as quickly 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 could encourage accounting abuses.

4. Beginning in fiscal 2014 (the year ended February 1, 2015), Krispy Kreme began using pre-tax income instead of EBITDA as a performance metric in its compensation plan. What information in the company’s balance sheets suggests its management may have been responding to changing financial incentives when the performance metric changed?

Answer 1

Question-1

Krispy Kreme's Management chose to extend. Krispy Kreme supposed to start brand-new stores. KK decided to sell KK doughnuts in the supermart moreover instantly felt the impact on their businesses. Stockholders will get profited when they start new wares that earn profits on capital which is higher than the cost of capital. Later it will show an accurate total worth of the new store, due those supervisors open the negative net value of the store which simply confers gain a negative return on assets that are higher than the cost of capital.

Question-2

Income and EBITDA are recognized as the production metric for economic times. The board selected 3 levels of production: which are origin, purpose, highest. That is necessary to practice the same meaning in the reward plan because it would be necessary for the supervisor/manager's compensation incentives. The aforementioned method will decrease incentive disputes among supervisors.

Question-3

The accounting violations involve live performances like giving franchisees to purchase doughnut mix moreover supply preceding. They replace accounting designs including expanded guidance. Accounting tricks are applied for supervisors/manager's incentives furthermore they will depend upon accurate profits.