Question

12-31. Management Control Systems and Incentives A company that we call "DC" is a Fortune 100 diversified conglomerate with operations in many industries around the world. Top management focuses on the annual earnings in evalu- ating the performance of division managers. Each year is a new ballgame for division managers. 5) The incentive plan includes an annual bonus that ranges from 7 to 40 percent of division managers' salaries. There is an element of relative performance evaluation in that the target earnings for each year are based on how well companies in the same industry are performing. Once the target is set, it is not changed during the year Failing to meet a division's target has serious consequences for the division manager First, the manager loses some or all of the potential bonus. Second, a manager who missesa target will find her job in jeopardy. Missing a target two years in a row generally means that the manager will be fired. Required a. What incentives does this plan give to division managers? b. Is this a good plan? Would you want to be a division manager in this company?

Answer 1

Answer. a) The company has a policy to reward the divisional managers on the basis of annual earnings of the specific division.

On the other hand, the company also has a policy of relative performance evaluation wherein a target is given to each divisional manager every year failing to which the policy has a very harsh policy of firing from job on missing those targets for 2 years.

These are agressive incentive policies wherein the divisional manager is always motivated to work and outperform its division as better the performance the higher will be its bonus.

The divisional manager will get a higher level of accountability on the work it does as the same will have impact the performance evaluation and yearly bonus.

Answer. b) The plan has both the sides. On one side it keeps the managers motivated to work hard but one the other hand the same might keep worrying the divisional manager in case it is not able to acheive the target given towards the year end. On one hand it might help company grow but on on hand the same may lead to employees of the company slogging for achieving the target.

If I would be offered to be the divisional manager of such company, I would be open to work in such environment as the same will help to bring and sharpen my leadership skills and work result oriented on the work I am assigned.