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Industrial Electronic Inc

Industrial Electronics Inc. is evaluating its bonus system amid an economy-wide recession. The company's decentralized structure and focus on innovation and cost control have led to success. However, the current bonus system, which pays no bonuses when company performance declines, fails to reward high performers during recessions and may reduce morale. The document recommends updating the bonus system to link rewards more directly to individual effort and divisional performance, even in difficult markets, to sustain motivation and innovation.

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Jacky Doan
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69 views1 page

Industrial Electronic Inc

Industrial Electronics Inc. is evaluating its bonus system amid an economy-wide recession. The company's decentralized structure and focus on innovation and cost control have led to success. However, the current bonus system, which pays no bonuses when company performance declines, fails to reward high performers during recessions and may reduce morale. The document recommends updating the bonus system to link rewards more directly to individual effort and divisional performance, even in difficult markets, to sustain motivation and innovation.

Uploaded by

Jacky Doan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Industrial Electronic Inc.

Issue: Evaluate the proposed bonus system.


Case Background:
- Industrial Electronics Inc. sells a wide range of electronic equipment.
- $8 Billion in sales.
- High-tech industry makes it difficult to forecast, since it’s a volatile industry.
- Goal is to maximize shareholder value.
- Competes on new/innovative products and price.
- We infer there is an economy-wide recession during the time period of this case.
KSF:
- Innovation.
- Good cost control due to price competition.
Current Management Control System:
- Decentralized by product line, set up into 4 Business Groups.
- Responsibility centre – there are 16 autonomous divisions, that act as Profit Centres.
- 25 Managers (All levels including and above Division Manager) receive an annual bonus
- Lower level managers are included in a “Management by Objectives” incentive plan.
- Bonus Pool based on 10% * [(Net Income – (12% of Assets-Liabilities)]
- Pool/Total Salary of 25 Managers = Award per salary $. Max = 150% of salary.
Issues:
- Both good and bad managers got no bonus in recession years.
- Rewards are not directly linked to individual effort/performance. Corporate performance
is uncontrollable (volatile industry, recession.)
- Profit-related targets can motivate a short-term view, thus sacrificing the innovation KSF.
- If the Company is not doing well, no bonuses are paid, but what if individual divisions
are doing very well – reduces their motivation to sustain that, given a recession year.
- Could reduce morale by this lack of motivation, and promote turnover.
Recommendations
- Charge for fixed assets based on market value to encourage replacement, and updated
technology.
- Use an appropriate cost of capital number based on actual levels of debt and equity
financing.
- Ensure budgets are challenging but achievable.
- Just meeting target is maybe worthy of a bonus, but not meeting it at all is not worthy of a
bonus.
- May want to consider a component on overall profits

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