Question

This is going to require a little reading, so take your time.

Storybook Homes, Inc. developed the following formula for bonuses: [T]he bonus shall be computed in the following manner

a. 0 to $10,000 Net Profit No Bonus

b. $10,000 to $20,000 a maximum bonus of 5% shall be paid to both [employees]

c. $20,000 and over a maximum bonus of 22% shall be paid to each

The firm earned $25,000 in profits, and the employees and firm differed over how to compute the bonus!

The employees believed the bonus should be computed this way: Net Profit $25,000 Bonus 22% x $25,000 = $5,500

2. The firm believed that each bonus percentage was to be on the incremental portion of Net Profits, like this:

Profit portion Resulting bonus Net profits –1 st interval Net profits – 2 nd interval Net profits – 3 rd interval $10,000 $20,000-$10,000 = $10,000 $25,000 -$20,000 =$ 5,000 $ 0 5% x $10,000= $ 500 22% x $5,000=$1,100 Total bonus $1,600

Storybook Homes, Inc. v. Carlson is a famous case because it seems that the bonus description is ambiguous. Either interpretation could be correct and in contract law, ambiguity is generally interpreted against the contract writer. In this case, the contract writer would be the company. The jury ruled for the employees. The judge entered a “Judgment notwithstanding the verdict” in favor of the company. So, the company was able to pay the bonuses according to their interpretation. This was odd because the judge went against the jury and ambiguity should have gone against the company.

Required:

a. Suppose you were an employee and believed that you would be paid based on the employee interpretation (22% x Net Profits), and profits were $19,900 in the week before year end. Would it pay to purchase enough merchandise yourself to bump the profits to $20,000?

b. It seems to me that we have multiple challenges to paying an employee according to their work. Todd Henderson illustrated a lot of challenges. The Storybook Homes, Inc illustrated ambiguity in the bonus scheme. Does ambiguity create more incentive to work diligently or less incentive to work diligently?

c. Comment on the judge ruling against the employees. Part of the judge's argument was that it wouldn't make business sense to view the bonus provision according to the employee interpretation. Was the judge reasonable?

Answer 1

a)

If the profit were $ 19,900 the bonus would be ($19,900-$10,000) x 5% : $ 495

No

The purchase to make the profit to $ 20,000 will not have big impact on the bonus receipt, in order to make the profit to $ 20,000, an additional $ 900 profit is needed, assuming the net profit margin on this product is 44%, it is necessary to purchase the goods for the value of atleast $ 2045. This amount of purchase will result in increase in bonus receipt of $ 5 at the cost of $ 2,045.00. Therefore, it is not advisable to make purchase decision

b)

This system of bonus scheme will encourage the employees to perform effieciently and productively. Because any increase in profit beyond $20,000 will result in bonus increase by 22% which is reasonable amount for employees considering the profit mark-up in this business setup. This scheme is well suited for the organization which percieves growth through productivity.

c)

The decision provided by judge is reasonable

The bonuss scheme clearly states the range and bonuss percentage for each limit, Also this scheme is business sense and employee supportive. This scheme will make sure that both businesses and the employees are benefitted from productivity enhancement and employee hard-work.