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In its Form 10-K for the year ended December 31, 2014, Caterpillar Inc. (CAT) reported diluted earnings per share (EPS) of $5.88, an increase of $0.13 from the prior years reported EPS of $5.75. The company attributed the increased EPS to better performance in several areas of its business. Overall, however, Caterpillars revenues, operating profit, and net income all declined in 2014.

Caterpillars CEOs year-end bonus is based on overall company performance and changes in EPS. The Board of Directors approves the CEOs compensation package, and the CEO is the Chairman of the Board. For the year of 2014, the CEO received a $2 million performance bonus.

An analysis of Caterpillars 2014 Form 10-K reveals that the company increased the number of treasury stock (common) shares held in the treasury by over 31.6 million shares during 2014.

Discussion points:

1. What effect do you think the increase in treasury stock shares had on Caterpillars EPS change in 2014? Explain.

2. Based on the information above, what effect do you think the companys performance had on the CEOs year-end bonus for 2014? Explain your answer.

3. What potential conflicts of interest can you identify in the determination of the CEOs compensation package? How might these conflicts be managed or eliminated?

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