Question

At the end of 2014, Elizabeth Bolton earned $50,000. In 2015, she earned a 5% increase. In 2016, she earned a 4% increase. In 2017, she earned a 6% increase. And in 2018, she earned a 8% increase. Calculate what her pay would be, if her increases had been permanent merit increases and what her pay would be, if her increases had been incentive bonuses. (Please fill in the following table.) Cost of Increase Total Salary Under Year % Permanent Merit Incentive Increase Increase $ Award $ Permanent Merit Incentive Increase $ Award $ 2015 5% 2016 4% 2017 6% 2018 8%

Answer 1

Salary as on 2014 is 50,000 Cost of Increase Total Salary Under Year % Increase Permanent Merit Incentive Award Permanent Merit Incentive Award 2015 5% 2,500 2500 52,500 52,500 2016 4% 2,100 -500 54,600 52,000 2017 3,276 1,000 57,876 53,000 2018 4,630 1,000 62,506 54,000 6% 8%

1. If i would be Elizabeth, i would prefer to be on Permanent Merit increase incentive plan.

Reason: This plan provides a better increase in the salary year on year basis, as the yearly increase adds to the actual salary permanently and which in turn increases the incentive for next year as it is calculated based the previous year (ie Actual+ Incentive), however that does not happen in annul bonus awards as it does not add to the actual salary while calculating the incentive for next year.

2.An organization would always try to reduce the cost and increase its profit, it would always prefer Annul bonus awards, which reduces the cost burden on salary year on year, as the bonus does not get permanently added up the actual salary while paying the incentive for next year and by that the increase of cost more or less remains same year over year.