The management of a publicly traded manufacturing company is reviewing the projected fourth quarter financial results in late November. Based on the projected sales, they will fall short of their yearly profit goals. This will result in the company’s executives and managers not receiving their year end bonuses. The management discusses how sales can be increased sufficiently to produce results that will qualify the executives and managers for year end bonuses. A decision is made to notify all
customers that if they will agree to accept shipments for first quarter orders prior to the end of the fourth quarter, the company will agree to pick up the shipping costs. The company’s controller and CFO review the plan and agree that it is within acceptable guidelines of Generally Accepted Accounting Principles (GAAP). The plan results in a significant increase in both sales and net income despite the company’s increased shipping costs. The increase is sufficient to warrant payment of bonuses to the executives and managers, and also results in a significant increase in the company’s stock price.
a. Was the incentive plan devised by the company’s management for the purpose of increasing sales and profits to a level justifying bonuses ethical?
b. Discuss any negative impact that this incentive program could have for the company and its shareholders in the future.