Question

2 question (20%) The management of Seligman Manufactoring has decided to tie employee compensation to EVA performance of the firm. The firm's CFO, Virginia Whitten, is to make a presentation to the CEO and board of directors illustrating how the program will work under both an unbounded and a bounded plan for awarding incentive compensation for a typical plant manager. To illustrate two plans, Virginia has chosen to use the compensation for a typical plant manager. Under proposed compensation plan, a plant manager would receive a base pay level of $100 000 plus incentive pay equal to 20 percent of this base if the firm hits its EVA performance target exactly. Required: Calculate the plant manager's incentive pay and total compensation for actual EVA performance of S15 000 000; S 20 000 000; and $30 000 000if the target level of EVA performance is set at $20 000 000. a. Now estimate the plant manager's incentive pay and total compensation for the same three level of EVA performance and target EVA but with a bounded incentive pay system that has a floor equal to 80 percent of the target performance level and a cap at 120 percent. What are the incentive effects for the plant manager of placing the loor and cap on target performance when determining the incentive pay? What plan (unbounded or bounded) would you recommend to Seligman Corporation and wlhy? b. Given: Base pay Incentive % Target EVA Performance S 100,000 20.00% S 20,000,000.00 a. Unbounded incentive plan Scenario A Scenario B Scenario C Actual EVA Performance S 15,000,000s20,000,000 30,000,000 Plant Manager Compensation Base pay Incentive pay Total compensation b. Bounded incentive plan (80/120) Scenario C Scenario A $15,000,000 Scenario B $20 Actual EVA Performance $30,000,000 Plant Manager Compensation Base pay Incentive pay Total compensation

Answer 1

In case of unbounded incentive plan as name suggest there is no limit for incentive.In real corporate world it differs for different level of employees.

In case of bounded incentive plan incentive provided with limit clause. Below or above from that range does not attract variable incentive.

Incentive calculation formula= Basic pay X Fraction of pay included for incentive X Actual Performance/Target Performance

Basic Pay	100000
Incentive %	20%
Target EVA Performance	20000000
	2
A.Unbounded incentive Plan
	Scenario A	Scenario B	Scenario C
Actual EVA Performance	15000000	20000000	30000000
	1.5	2	3
Plant Manager Compensation
Basic pay	100000	100000	100000
Incentive pay	0	20000	30000
Total Compensation	100000	120000	130000
B. Bounded Incentive plan (80/120)
	Scenario A	Scenario B	Scenario C
Actual EVA Performance	15000000	20000000	30000000
Plant Manager Compensation
Basic pay	100000	100000	100000
Incentive pay		20000	24000
Total Compensation	100000	120000	124000

It can be seen that in bounded incentive plan total compensation is less, hence it is more beneficial for company.