| Industrial Electronics, Inc. |
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| Management Accounting |
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| Management Control Systems |
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| Organizational Behavior |
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Beginner |
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2 |
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Available.
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$9.00
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My division had another great year last year. We all worked hard, and
the results were there. But again we got no reward for our hard work.
It's very frustrating.
—Division Manager, General Products Division, Industrial Electronics, Inc.
Industrial Electronics, Inc. (IE) produced a wide range of electronic
equipment, including signal sources, test equipment, communications
systems, and various piece parts and subassemblies such as motors,
generators, and probes. Total annual sales were in excess of $8
billion. IE's stock was listed on the New York Stock Exchange.
The company's objective was to maximize shareholder value. In most of
its business areas, IE had to be innovative to stay ahead of the
competition. However, price competition was also significant, so the
company also had to maintain tight control over costs.
The company was organized by product line. Its 16 relatively autonomous
divisions were managed as profit centers. The division managers
reported to one of four Business Group managers who, in turn, reported
to the company's CEO.
Thirty managers, including all line managers at the level of division
manager and above plus key corporate staff managers, were eligible for
an annual management bonus award. (Many lower-level employees were
included in a separate “management-by-objectives” incentive plan.) The
management bonuses were based on company-wide performance. Each year, a
bonus pool equal to 10 percent of the corporation's profit after taxes
in excess of 12 percent of the company's book net worth was set aside
for assignment as bonuses to managers. This amount was divided by the
total salary of all the executives eligible for a bonus. This yielded
an “award per dollar of salary.” The maximum bonus paid was 150 percent
of salary.
Historically IE's managers had been earning bonuses that ranged from of
30-120 percent of salary, with the average approximately 50 percent.
But because of the recession in the years 2000 and 2001, the bonus pool
was zero.
Complaints about the management bonus system had been growing. Most of
them stemmed largely from division managers whose divisions were
performing well, even while the corporation as a whole was not
performing well. These managers believed that the current bonus system
was unfair because it failed to properly recognize their contributions.
The quote cited at the beginning of the case was representative of
these complaints.
Assignment
1. (20%) Calculate the bonus award
(as a percent of base salary) that would be given to the manager of
each of the following four divisions under the proposed new bonus
system. These divisions are representative of the range of divisions
within IE. (All numbers in $000) [Table omitted from web page]
2. (20%) Evaluate (i.e., discuss the pros and cons of) the current bonus system.
3. (30%) Evaluate the proposed bonus system.
4. (30%) Propose a bonus system that you believe is optimal for IE.
Why do you think your proposed system is optimal? Explain.
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