Benjamin Vincent is the CFO of Annie Company. The company’s CEO has asked Benjamin to design an incentive scheme that will motivate employees to focus more on the company’s bottom-line results. Benjamin is considering a plan that will give each employee a bonus based on the company’s reported net income for the year. Each employee will receive an amount equal to the company’s earnings per share multiplied by either 10,000 times, 50,000 times, or 200,000 times, depending on the employee’s level in the company. Last year, Annie Company’s earnings per share was $1.31. Benjamin has asked you for your advice. In particular, he wants you to explain the disadvantages of having an earnings-based bonus system.
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Benjamin Vincent is the CFO of Annie Company. The company’s CEO has asked Benjamin to design an incentive scheme that will motivate employees to focus more on the company’s bottom-line results. Benjamin is considering a plan that will give each employee a bonus based on the company’s reported net income for the year. Each employee will receive an amount equal to the company’s earnings per share multiplied by either 10,000 times, 50,000 times, or 200,000 times, depending on the employee’s level in the company. Last year, Annie Company’s earnings per share was $1.31. Benjamin has asked you for your advice. In particular, he wants you to explain the disadvantages of having an earnings-based bonus system.
Disadvantages of Earning based Bonus System:
1) Employee Motivation: In general earning based bonus fails to drive the motivation of the employees who tend to be the liabilities (dead weight) rather than the assets in the team. When each employee get the same incentive (multiplier times the EPS), the performers and non-performers would be equally rewarded. This overall will fail to bring up the low performers given the fact they are making the same as the high performers in their team or those in the same level in the hierarchy.
2) External Factors: Employees who are diligent and high performers, might not be incentivized justifiably due to the EPS of the company going down attributing to external factors, like Market Trends, Government Policies, Corporate Action, etc. In other words, in Earning based bonus system employees will miss out on opportunities due to factors beyond their control.
3) Entitlement vs Motivation: When employees get Earning based bonuses, they tend to see it as an entitlement similar to other company based perks. Thus eventually, this mode of incentive fails to motivate employees, because they tend to understand that their own contribution is in a "pin in a haystack", which hardly makes or breaks their potential to earn a certain amount of bonuses.
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Benjamin Vincent is the CFO of Annie Company. The company’s CEO has asked Benjamin to design...
Discussion Case 6-1 Should We Implement an Earnings-Based Bonus Plan? Benjamin Vincent is the CFO of Annie Company. The company’s CEO has asked Benjamin to design an incentive scheme that will motivate employees to focus more on the company’s bottom-line results. Benjamin is considering a plan that will give each employee a bonus based on the company’s reported net income for the year. Each employee will receive an amount equal to the company’s earnings per share multiplied by either 10,000...
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Stephenson Real Estate Company was founded 25 years ago by the current CEO, Robert Stephenson. The company has shown a profit every year for the past 18 years, and the shareholders are satisfied with the company’s management. Prior to founding Stephen-son Real Estate, Robert was the founder and CEO of a failed alpaca farming operation. The resulting bankruptcy made him extremely averse to debt financing. As a result, the company is entirely equity financed, with 9 million shares of common...
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