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In: Accounting

Company is a small, but diversified, moving and storage company. In recent years, its corporate income...

Company is a small, but diversified, moving and storage company. In recent years, its corporate income has declined to unacceptable levels. To change the direction of the company, the board of directors hired a new chief executive officer. She is currently considering three alternative ways as to how division managers are rewarded for their performance. They are:

  1. Give each manager a competitive salary with no bonus for performance.
  2. Give each manager a base salary with the largest portion being a bonus based on performance, ROI being the yardstick.
  3. Give each manager a base salary with a bonus based on comparative performance with the other divisions.

Evaluate each of the ideas, giving at least one strength and one weakness for each.

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Expert Solution

Answers:-

■1)Give each manager a competitive salary with no bonus for performance.

●1)Opportunities for salary increases might be decided via other means such as improvements inemployee motivation, cost savings ideas, or improved management skills.

This method will fit sometypes of situations and managers better than the bonus methods, but should not be used in situationswhere a high degree of motivation is desired.

■2)Give each manager a base salary with the largest portion being a bonus based on performance, ROI being the yardstick.

●2.The second idea is good for motivating a manager to improve the performance of each givendivision.

A weakness in this method occurs when managers make decisions that maximise return oninvestment in the short run because they have no intent to stay with the company over a long period of time.

■3)Give each manager a base salary with a bonus based on comparative performance with the other divisions.

●3)The third method is great for motivating managers to compete with each other.

However, somereward should be available for the lowest rated manager if that manager's performance is, in fact, abovethe company's standard for performance.

Suboptimisation is a potential problem with this approach ifthe winning manager's bonus is substantially above everyone else's bonus.

ekkarill92 answered 2 years ago
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