HCC industries, a manufacturing company that produces hermetically sealed electronic connection devices along with microelectronic packages, is headquartered in Encino, California. Considering their highly sophisticated product line, one of HCC’s main clients was the U.S Military and government funded aerospace programs. HCC is made up of four distinct operating divisions: Hermetic Seal, Sealtron, Glasseal, and Hermetite. The divisions are highly decentralized and completely autonomous of each other. They all have different customer bases, different product lines and even different accounting systems. The divisions are also profit centers, by definition; each was responsible for their sales, costs, and bottom line. Each division also needed approval for any capital acquisition over $500. Target Setting
Each division was evaluated in 7 standard key areas: Profit before Tax, Bookings, Shipments, Returns (as a % of total dollars shipped), Rework Aging, Efficiency (net sales/no. of employees), and Delinquencies, which were measured on dollar volume and % of delinquent orders outstanding. These evaluations were measured each quarter (with monthly “check-ins”) and were highly emphasized, the most of which was Profit before Tax. Until 1987, HCC stressed “stretch” performance targets. Top management felt that these aggressive targets would push managers to produce the very best results, even though they knew that the intended probability of meeting these objectives was around 75-80%. This setup allowed managers to be appraised based on their actual to budgeted figures. However, there were two sides to these appraisals: an objective view and a subjective view. The objective view looked purely at the numbers. If the divisions Actual Profit before Tax was 60% or greater than Budgeted, the corresponding manager may receive up to 150% of their bonus potential. The subjective view however, was based on top management’s assessment of the degree of completion. If a division...
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