Issue: Evaluate the proposed bonus system.
Background: “My division had another great year last year. We all worked hard, and the results were there. But again we got no reward for our hard work. It’s very frustrating.” Division Manager.
• Good cost control due to price competition.
• Industrial Electronics Inc. sells a wide range of electronic equipment. (Like EVERY other case!!!) • $8 Billion in sales.
• High-tech industry makes it difficult to forecast, since it’s a volatile industry. • Goal is to maximize shareholder value.
• Competes on new/innovative products and also price.
• We infer there is an economy-wide recession during the time period of this case.
Current Management Control System
• Decentralized by product line, set up into 4 Business Groups. • Responsibility centre – there are 16 autonomous divisions, that act as Profit Centres. • 25 Managers (All levels including and above Division Manager) receive an annual bonus • Lower level managers are included in a “Management by Objectives” incentive plan. (This is a system that offers incentives based on the achievement of a number of specific objectives, which may not all be financial, ie: # of new customers added, # of successful orders filled in a month…) • Bonus Pool based on 10% * (( Net Income – (12% of Assets-Liabilities)) • Pool/Total Salary of 25 Managers = Award per salary $. Max = 150% of salary. • Before 2000, average bonus was 50% of salary…..in 2000 and 2001 bonus was $0. (Recession.)
Problem: Both good and bad managers got no bonus in those years.
Pros of Current Bonus System
• Managers only get bonuses when the Company profits, and can afford it – this “shares the wealth.” • Encourages teamwork, due to having a common profit goal, but it seems these units are independent. • Performance targets are fixed, timeless and without...