After the first three quarters of the year, Apex, Inc., was well ahead of its budgeted targets for corporate income and earnings per share. During the fourth quarter, the company found that divisional managers were holding sales open, thereby delaying revenue recognition to the following year. Several sales of assets expected to generate gains were also delayed for no apparent business reason. Given the behavior of its divisional managers during the fourth quarter, it is likely that:
A) Apex, Inc., employs a performance/reward function with a linear shape.
B) Apex, Inc., employs a performance/reward function with an upper limit or cap on bonus payments.
C) Apex, Inc., employs a performance/reward function with a floor.
D) Apex, Inc., does not provide incentive payments to divisional managers.

Question

Quizplus · Accepted Answer

The behavior of the divisional managers delaying sales and asset gains suggests that Apex, Inc., likely employs a performance/reward function with an upper limit or cap on bonus payments. By postponing revenue recognition, managers appear to be managing earnings to ensure they meet targets in the following year, indicating they might have already reached the maximum bonus they could achieve for the current year.

After the First Three Quarters of the Year, Apex, Inc