Below is a portion of a 2013 proxy form sent to shareholders of Miracle- J Corporation. It reveals that Miracle- J has a bonus plan for its three senior executives that allocates them 10% of before- tax profits. Also, under the Employee Stock Option Plan, share options up to 12% of capitalization may be granted to directors or employees.
a. Explain the reason for the bonus plan for senior executives. Are there any possible dysfunctional consequences of the bonus plan resulting from the apparent lack of a cap? Why is the bonus based on before- tax profits, rather than after- tax?
b. Explain reasons for the Employee Stock Option Plan in addition to the bonus plan for senior executives. Why does the Plan apparently apply to all employees?
c. To what extent would the bonus plan cause management to be concerned about accounting policies and changes in GAAP?