Pioneer Savings and Loan
Late in the third quarter of 1994, the board of directors of Pioneer Savings and Loan of Orlando, Florida requested that their president, Herbert Jones, submit a recommendation on whether or not to grant branch managers a cash bonus that year. According to the company’s Management by Objectives (MBO) system, the granting of yearly bonuses was contingent upon the attainment of specific corporate profit objectives, in addition to the individual manager’s performance against pre-established MBO targets. Earnings in 1994 were targeted for a 15% increase over the 1993 profit. This 15% growth objective was established late in 1993 when management fully expected that Pioneer Savings could continue compounding the growth at a rate of 15% to 20% per annum it had achieved in the previous few years. But a variety of factors had conspired to hit Pioneer Savings’ bottom line hard in 1994. An active hurricane season had brought with it torrential rains, washing away millions of tourist dollars. Many locals had been forced to withdraw (rather than add to) savings to meet living expenses, which depleted Pioneer’s assets against which to make loans. Perhaps related to lower numbers of northern visitors was a mini-glut in housing, and the construction industry had slowed (albeit briefly) to a crawl. Finally, what house buyers there were seemed more and more to be arriving in Orlando with allegiances to their home northern financial institutions in tow, as several carpetbagging northern financial institutions (primarily a couple of North Carolina banks) made stronger and stronger inroads into the central Florida economy. The picture didn’t look so bad long-term, but the immediate future was not rosy.
Herbert Jones clearly knew that the 1994 MBO goals and profit objectives would not be met. He commented:
We did a bad job of picking objectives for 1994. We had been lulled to sleep by a fantastic growth rate and a good economy. In 1994, things went to hell and our targeted 15% increase in profit before tax was not realistic. You know we base our bonus on the company meeting its profit objectives. In the past years we have been able to give handsome bonuses, and in return I expect a lot from our people. If our managers don’t perform, then we are doing them a disservice by keeping them on staff.
Jones considered the MBO system to be the cornerstone of management productivity and morale. He wondered if he should recommend a bonus to reward managers for their exceptional efforts even though the desired results had not been achieved. If he did give a bonus, what impact would it have on the future credibility of the MBO system?
About Pioneer Savings
Pioneer Savings of Orlando, Florida received its charter in 1954 as something of a financial cooperative for the Orange County association of citrus farmers. When Walt Disney World arrived on the central Florida scene, management recognized the long-term non-farm growth potential of the Orange County economy, and initiated a program of careful branch expansion. The criteria established for opening a new branch were the potential economic growth in the immediate area and the marketing advantages of offering convenient services to local residents. According to management, the development of these branches gave the company a unique, competitive advantage since a branch opening, in nearly every instance, was the forerunner of the development of a local shopping center. By the end of 1994, Pioneer Savings planned to operate 30 branches (divided into 3 “regions”) and 5 subsidiaries specializing in management services to the real estate industry and thrift institutions.
MBO and the Bonus Plan
In the eyes of top management, superior employee performance had always been the key to accelerated corporate growth and profits. Both George Leonard, chairman of the board and chief executive officer, and Jones felt that if outstanding...
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