Question

Accounting - Propose a bonus system that you believe is optimal for IE. Why do you think your proposed system is optimal? Explain

Answer 1

EVALUATE THE PROPOSED BONUS SYSTEM. (30%) . PROPOSE A BONUS SYSTEM THAT YOU BELIEVE IS OPTIMAL FOR IE. DISCUSSION THE CASE STARTS BY DESCRIBING AN INEFFECTIVE INCENTIVE SYSTEM. THE OLD SYSTEM WAS REPLACED BY A NEW SYSTEM THAT IS QUITE DIFFERENT, BUT STILL NOT WITHOUT PROBLEMS.

MEANWHILE, A STRONG ECONOMY HAS RESULTED IN A TIGHT JOB MARKET. SO WHILE SMALL BUSINESSES NEED TO GET MORE FROM THEIR EMPLOYEES, THEIR EMPLOYEES ARE LOOKING FOR MORE OUT OF THEM. EMPLOYEE REWARD AND RECOGNITION PROGRAMS ARE ONE METHOD OF MOTIVATING EMPLOYEES TO CHANGE WORK HABITS AND KEY BEHAVIORS TO BENEFIT A SMALL BUSINESS.

THE COMPANY'S OBJECTVE WAS TO MAXIMIZE SHAREHOLDER VALUE. IN MOST OF ITS BUSINESS AREAS, IE HAD TO BEINNOVATVE TO STAY AHEAD OF THE COMPETTON. HOWEVER, PRICE COMPETTON WAS ALSO SIGNIFCANT, SO THECOMPANY ALSO HAD TO MAINTAIN TGHT CONTROL OVER COSTS.

N RESPONSE, TOP MANAGEMENT, WITH THE ASSISTANCE OF PERSONNEL IN THE CORPORATE HUMAN RESOURCES AND³INANCE DEPARTMENTS, PROPOSED A NEW MANAGEMENT BONUS PLAN WITH THE FOLLOWING FEATURES:

· BONUSES WOULD BE DETERMINED BY THE PERFORMANCE OF THE ENTTY FOR WHICH EACH MANAGER WASRESPONSIBLE. ±HAT IS, DIVISION MANAGER BONUSES WOULD BE BASED 100 PERCENT ON DIVISIONPERFORMANCE; GROUP MANAGER BONUSES WOULD BE BASED 100 PERCENT ON GROUP PERFORMANCE; ANDCORPORATE MANAGER BONUSES WOULD BE BASED 100 PERCENT ON CORPORATE PERFORMANCE.

· BONUS AWARD PURPOSES, ACTUAL PERFORMANCE WOULD BE COMPARED WITH TARGETS NEGOTATEDDURING IE'S ANNUAL BUDGETNG PROCESS. IE'S PHILOSOPHY WAS TO TRY TO SET BUDGET TARGETS SO THATTHEY WERE 80–90 PERCENT ACHIEVABLE BY E´ECTVELY PERFORMING MANAGEMENT TEAMS. CORPORATEMANAGERS KNEW THAT IE WAS A “HIGH TECH” COMPANY THAT OPERATED IN MANY BUSINESS AREAS INWHICH IT WAS DIµCULT TO FORECAST THE FUTURE ACCURATELY. OPERATNG ENVIRONMENT THAT MIGHT TURN OUT TO BE MORE HARSH THAN THAT SEEN AT THE TME OFBUDGET PREPARATON.

· EACH DIVISION WOULD BE GIVEN AN “ECONOMIC PROFT” OBJECTVE EQUAL TO BUDGETED OPERATNG PROFTMINUS BUDGETED OPERATNG ASSETS MULTPLIED BY 12 PERCENT, WHICH WAS ASSUMED TO BEAPPROXIMATELY IE'S WEIGHTED AVERAGE COST OF CAPITAL.

· IF AN ENTTY'S ACTUAL ECONOMIC PROFTS WERE EXACTLY EQUAL TO ITS OBJECTVE, THE MANAGER WOULD EARNA BONUS EQUAL TO 50 PERCENT OF SALARY.