To find out whether or not Mr. Gonzales should implement the new compensation plan, we will initiate with a valuation of the proposed bonus plan that he is considering. This evaluation will include an analysis of the key decisions and the persons responsible for making the decision as well as a discussion of the proposed plan. Upon this analysis we will conclude whether it is a good idea to implement it and state our suggestions for a modification of the plan.
Valuation of the proposed bonus plan
Included in the new bonus plan are the store managers (SM), the regional managers (RM), and the corporate staff managers (CM). Not included are the CEO (Mr. Gonzalez) and the COO; their bonuses would be decided by the compensation committee of the board of directors. Furthermore all other employees not included in the plan would continue as before with a bonus in the range of 2%-5% of base salary. Each of the company’s 82 stores is operated by a SM, who has a lot of autonomy. The 82 store are organized into 9 geographical regions. The RMs are responsible for providing oversight and advice to the SMs, whom had little formal education. On the top of these two manager levels are the CMs, who are responsible for a range of centralized functions including purchasing, human resources, marketing, real estate, and investor relations. The proposed bonus plan consists of 4 million pesos plus 8 percent of the corporate income before bonuses and taxes in excess of 120 million pesos. The total bonus pool will be divided between the managers as following: SMs – 70%, RMs – 15%, and CMs – 15%. This year, the bonus pool will amount to 8,498,400 million pesos (all calculations: cf. the calculations for the Whiz Kids questions on the last page), meaning that the bonus pool will be divided by the different manager levels as following: •
5,948,880.00 million pesos
1,274,760.00 million pesos
Corporate Staff Managers
1,274,760.00 million pesos
The SMs’ bonus pool will be divided among the store managers based in their relative proportion of bonus units earned. The maximum number of bonus units are 6, with a lower cutoff level at 5% ROI and a upper cutoff level at 11% ROI. These cutoffs stipulate an acceptable minimum performance, while restricting superior performance. Denying bonuses for exceptionally good efforts can be justified by the fact that the performance results can be good luck. Moreover it, to a certain degree, ensures that the managers will not be myopic, which again ensures that the company will show a more steady performance improvement over time. Another reason for the upper cutoff level on the incentive payments might be a desire of not paying lower-level mangers more than upper level managers. In this case, a SM gets 72,547.32 pesos in average, RMs get 141,640.00 pesos, and CMs get 254,952.00 pesos. A top-performing SM cannot earn more than 118,189.68 pesos in bonus. This is less than the CM’s bonus, so in this case the upper cutoff definitely ensures that the lower-level managers cannot earn more than the upper-level managers. The bonus pools will be assigned to managers based on their entity’s ROI, given by following formula: ROI = (bonus eligible revenues – expenses) / total store investments. Using ROI as the central measurement of performance causes some problems: •
Accounting profit does not reflect the total value of the company and is therefore not a completely fair method •
Management myopia: a ROI-focus stimulate shortsightedness, and can undermine long-term focus, which may not be in the interest of the corporation •
Suboptimization – it may not be in the interest of the enterprise that individual regions will focus solely on the success of themselves rather than on the overall success of the company •
Regional differences in e.g. investment prices, local expenses etc. All bonuses will be paid in cash as soon as financial statements have been prepared. Beside...
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