Question

HighTech Industries (HTI) is a worldwide manufacturing company that specializes in high technology products for the aerospace, automotive and plastics industries. The state of the art technology and business innovation have been key to HTI's success over the last ten years. After a meeting of the board of directors, there was some feeling that the company was moving away from its goal of striving to maintain and expand their global position through innovative management teams.

One area of concern was with the company's bonus compensation package. The company's current bonus plan focuses on giving reward based on the utilization of capital within the company, i.e. management of inventory, collection of receivables and use of physical assets. Even with such a state of the art bonus plan, the board of directors are concerned with the short-term focus of the compensation package. HTI's basis in current financial practices suggests that the future period consequences of managerial actions will not be reflected when presenting bonus compensation.

Required:

Help HTI solve the problem of its current bonus compensation package. Explain how this bonus compensation package should be revised, if necessary.

Answer 1

Bonus plan currently in place is based on the capital efficiency whereas the vision of the Company it to specialize in the high technology which is self contradictory as former depends on short term measure and later requires emphasis on long term action consequence resulting in typical outcome people would focus on managing the capital rather than focussing on innovation.

The Company should address following considerations on the bonus plan revision process-

a. Emphasis on long term vision of the company

b. Identifying appropriate KPI's for different teams as not all the department's will be involved in innovation eg. HR

c. Linking KPI's to measurement basis

d. Assigning monetary value to each KPI outcome

Mangement should go for outcome based plan and tie the R&D team's bonus to innovation outcome e.g. Patent filing and approval. Also, different team's to get different levels of bonus eg. R&D team to receive super normal bonus whereas finance team to always receive normal business.