The first point about the current bonus system is one that can be viewed as either a pro or a con the fact that the bonuses are based on a company-wide performance. On the positive side, a bonus structure based on overall company performance displays a unitary goal as the main objective. This means that either everyone in the company enjoys the fruits of success or nobody does. Negatively, this also means that if a specific division has a great year, but the overall company doesn't perform that well, the people involved with the excelling division aren't rewarded financially for all of their hard work.
The current bonus system also only allows for bonuses to be distributed if there are profits more than 10% (after taxes) in excess of 12% of the company's net book worth. If profits are low, then no bonuses are distributed. This was the case in years 2000 and 2001 when IE was adversely affected by the economy recession there was no money in the bonus pool at all.
The amount calculated above was then divided by all the executives that were eligible for a bonus in that given year. Another problem within this system is that all managers eligible are equally distributed the total amount set aside for a bonus. This means that a manager that sets records for sales and efficiency is awarded the same bonus amount as a manager that barely surpasses performance goals. This does not seem fair.
A good thing is that there is the potential to earn more than 100% of salary as a bonus. Most employees would consider this a very healthy bonus, even though the average sits around 50% of salary.
The first thing that must be calculated to find the percentage of salary awarded as bonus for the five divisions is to calculate the economic profit objective. This is calculated a: Budgeted Operating Profit (Budgeted Operating Assets * 12%). The 12% is the assumed rate of IE's weighted average cost of capital. This is listed in Table 1 along with the...
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