Question

(b) In the following year, the performance sharing plan parameters were:

$ millions	Threshold	Target	Stretch
Earnings from Operations	$420	$490	$560

Given the same level of EFO of $332, what is the size of the profit-sharing pool using these updated parameters.
Be able to discuss the implications of raising the parameters from one year to the next.

Profit-sharing plan at Hoechst Celanese Hoechst Celanese, a pharmaceutical manufacturer, has used a profit-sharing plan, the Hoechst Celanese Performance Sharing Plan, to motivate employees. To operationalize the plan, the Hoechst Celanese executive committee set a target earnings from operations (EFO). This target was based on the company's business plans and the economy's expected performance. The performance sharing plan also used two other critical values: the earnings from operations threshold amount and the earnings from operations stretch target. The targets for a given year are shown here: $ millions Threshold Target Stretch $250 $320 $390 Earnings from Operations The plan operates as follows: If earnings from operations fall below the threshold value, there is no profit sharing. If earnings from operations lie between the threshold amount and the target, the profit-sharing percentage is prorated between the threshold award of 1% and the target payment of 4%. For example, if earnings from operations were $285 million, the profit-sharing percentage would be 2.50% : Profit-sharing percentage = 1% + { 3% X [( $285 - $250)/($320 - $250)]} = 2.50% (rounde to the rest two decimals) Profit-sharing pool = 2.50% X $285,000,000 = $7,125,000 If earnings from operations are between the target and the stretch target, the profit-sharing percentage is prorated between the target payment of 4% and the stretch-sharing payment of 7%. For example, if earnings from operations were $350 million, the profit-sharing percentage would be 5.29% , and the profit-sharing pool would be $18.52 million: Profit-sharing percentage = 4% + {3% x [( $350 - $320 )/( $390 - $320 )]} = 5.29% (rounded to the nearest two decimals) Profit-sharing pool = 5.29% X $350,000,000 = $18,515,000 If earnings from operations equal or exceed the stretch target level, the profit-sharing pool would be $27.3 million: Profit-sharing pool = 7% X $390,000,000 = $27,300,000

Answer 1

(b) In the following year, the performance sharing plan parameters were: $ millions Threshold Target Stretch Earnings from Operations $420 $490 $560 If earnings from operations fall below the threshold value, there is no profit sharing. Given the same level of EFO of $332, the Earnings from Operations (EFO) will fall below the updated threshold value of $420 million. Hence there would be no profit sharing and hence no Profit-sharing pool. Profit - sharing pool = $0 The implications of raising the parameters from one year to the next are 1 Raising the parameters from one year to the next would motivate employees to work more effectively and efficiently so that the company can reach the performance sharing plan parameters and the employees would earn profit-sharing pool. 2 Raise in the parameters should be based on the expected economic performance and the Company's achievable targets. If the parameters are raised beyond the normal limits, then it would demotivate the employees that the parameters are not reachable and may lower their effectivity and efficiency.