CASE STUDY PROBLEMS I:9-83 Ajax Corporation is a young high-growth company engag

Question

CASE STUDY PROBLEMS

I:9-83 Ajax Corporation is a young high-growth company engaged in the manufacture and distribution of automotive parts. Its common stock has doubled in value since the company was listed on the NASDAQ exchange about two years ago. Ajax currently has a high debt/equity ratio due to the issuance of debt to finance its capital expansion needs. Despite rapid growth in assets and profitability, Ajax has severe cash flow problems and a poor working capital ratio. The company urgently needs to attract new executives to the organization and to provide financial incentives to existing top management because of recent turnover and high growth. Approximately 55% of the common stock is owned by Andrew Ajax, who is the CEO, and his immediate family. None of the other officers own stock in the company.You are a tax consultant for the company who has been asked to prepare suggestions after reviewing the compensation system. Your discussions with several top management individuals reveal the following aspects of corporate strategy and philosophy:

• The company needs to expand the equity capital base because of its concern for the

high risk caused by large amounts of debt.

• Improvement in cash flow and liquidity would enhance its stock price and enable the

company to continue its high growth rate.

• Top management feels that employee loyalty and productivity would be improved if all

employees owned some stock in the company. The company currently offers a qualified

pension plan to its employees and executives that provides only minimal pension benefits.

No other deferred compensation or bonus arrangements are currently being offered.

• Andrew Ajax feels that the top management group should own a substantial amount

of Ajax stock to ensure that the interests of management correspond with the shareholder

interests (i.e., the maximization of shareholder wealth).

The following four types of executive compensation arrangements have been discussed:

• Sec. 401(k) and ESOP plans for employees.

• Encourage all employees and executives to independently fund their retirement needs

beyond any Social Security benefits by establishing IRA plans.

• Provide restricted property arrangements (using Ajax stock) to attract new top level

executives and to retain existing executives.

• Offer nonqualified or incentive stock options to existing and new executives.

Required: Prepare a client memo that recommends revisions to Ajax Corporation’s existing compensation system for both its employee and executive groups. Your recommendations should discuss the pros and cons of different deferred compensation arrangements and should consider both tax and nontax factors.

Explanation / Answer

After reviewing your case Ajax Corporation this is what I would recommend.

One way to attract and retain employees would be implanting the 401(k) Savings Plan: How does the 401 k plan work? Well to start off the plan got its name from the paragraph (k) and section (P). Moreover, you tell your employer how much money you want to put into the account but with a limit. Plus, that money is money before taxes are calculated or when you get your hands on it. Furthermore, if you match that dollar for then you can create an incentive for the employee to invest in the company. Lastly, this money is given to third parties so it can be invested in mutual funds, bonds, money market accounts, etc.

Which leads me to my next subtopic of a 401k plan and that’s disadvantages. Some disadvantages include the potential fees or charges that come along with it. Moreover, these fees sometimes reduce the growth rate of your growth rate. Another one that exist which is one that shouldn’t prevent you from investing in it and that is sometimes companies don’t match you.

Another thing that can be offered to employees is the ESOP: How does this plan work? Well to start off with this plan, it’s a plan allows that allows employees to buy stock directly, or be given it as a bonus, or receive it as stock options from the company. Moreover, they are used to provide a market for the shares of departing owners of successful closely held companies, to motive and reward employees. Also companies take advantage of this by using hat money to buy new assets.

But disadvantages of them would be that when shareholders are looking to cash sometimes they have a hard time getting the full cash out. Furthermore, this happens because the company needs to have funds available. Hence, sometimes they are required to receive a payment plan.

Lastly, to provide incentives for current or new executives then your company should offer executive stock options plans. Moreover, these are options that are required for minimum holding period which is usually a long time which is typically ten years. Nevertheless they provide the executive the power to buy shares of common stock at a stated value. But this can be confusing for them because if they don’t have any experience it can result in losing investments along the way since the don’t know what they are doing.

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