Question

The U.S. division of Swiss Chocolate has a budget directive to achieve a specific level of operating income for the period. If the specific level of operating income is achieved, the plant manager, Rick White, will receive a bonus.

White communicated the requirements to management and requested that the managers estimate their departmental costs and submit them to Smith for compilation of the operating budget for the period. When the projected budget costs were compiled, Smith noted that management’s estimates of costs were less than anticipated, which resulted in a higher anticipated level of operating income than the target established by the Swiss home office. White was informed of this, and suggested to increase costs within the budget in order to provide a “buffer” in case an unexpected event occurred resulting in greater spending. Smith was greatly concerned with White’s request.

Rick indicated that this was just his suggested approach to “risk management.”

1. What type of practice is Rick suggesting?

2. What are the ethical implications for Steve in this situation?

3. What would you suggest Steve do to solve this dilemma?

4. Would your position on this scenario change if this occurred at the home office (in Switzerland), rather than at a U.S. division? Why or why not? Would the ethical implications be the same or different?

Answer 1

1. The practice which Rick suggesting is that the future costs should be put on conservative manner. There is no need for any buffer for any unexpected event to occur in future. This practice will anticipate higher level of operating income and simultaneously increases the bonus for plant manager Rick.
2. The ethical implications for Rick in the situation is that for increasing the bonus, Rick has intentionally make a risky budget, while conservative approach is adopted towards spending. All this is being done to enhance the bonus, which is based on Operating income of the plant. As the plant is based in US, so being the head of the division, Rick has to be conservative and provide for each and every situation.
3. The suggestion towards the budget should be reviewed and any buffer is required for any unexpected event or situation before finalization of the budget without being unethical and bias.
4. The position on this scenario would be totally different at the home office because specific level of operating income would not be put to plant manager Rick for his bonus purpose. The implications would not be ethically wrong because everything has been taking place before management. Rick would not be ethically wrong.