Performance Evaluation and Risk Aversion Heartwood Furniture Corporation has a line of sofas marketed under the name NightTime Sleepers. Heartwood management is considering several compensation packages for Amy Johnson, NightTime’s general manager. Amy’s duties include making all investing and operating decisions for NightTime.
Required
1. Amy is risk-neutral and prefers to receive the maximum reward for her hard work. Do you recommend compensation based on flat salary, an ROI-based bonus, or a combination of both? Why?
2. If Amy does not make investing decisions for NightTime, is ROI still a good performance measure? If so, then explain why. If not, suggest an alternative.
3. Heartwood Furniture plans to evaluate Amy by comparing NightTime’s ROI to the ROI of Stiles Furniture, which operates in a business environment similar to that of NightTime. Both companies have the same capabilities, but Stiles uses a significantly different manufacturing strategy than NightTime.
a. Would evaluating Amy with this benchmark be fair?
b. Would using residual income instead of ROI offer any advantages for Heartwood?
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