Duckworth Industries Inc.

University Degree Business and Administrative studies

Land Rover “Discovery”

December 1, 2003

Questions 1-A: . Evaluate the incentive package for plant-level employees consisting of the attendance bonus, the quality incentive plan, the profit sharing plan, and the individual incentive plans; What problems do these plans solve? What problems do they create?

Attendance Bonus: An attendance bonus which is 60 cents per hour pay incentive was earned for each pay period during which an employee was never more than 2 minutes late for work. It motivates employees to be punctual by provides cash rewards. It measures every employee equally, as the same plan is used for everyone at the plant level. It also increases Return on Management (ROM) since the plan lacks of need for disciplinary actions, therefore increases management’s awareness on the other relevant factors, productivity will also be increased as more work would be done by increasing efficiency Finally, part or all of the cost of the plan would be paid by the increase in the productivity.

However, this plan will only motivate employees to show up to work on time, but won’t motivate employees to work effectively, productivity won’t be increased. The attendance bonus may create the problem of hurting valuable employees for legitimate work absences. This plan may add amount of stress to rush to work and the possibility of collusion between employees (that is one employee will punch in for his fellow co-worker if he is late for work).

Quality Incentive Plan: A quality incentive plan including many variables for instance meeting promised shipment dates and reducing customer complaints that target equaled $100 per employee per month to highlight the importance of quality in the company culture. Performance often measured a team effort, thus employees are working together to increase organizations profitability by finding new ways to work proficiently and increases quality of the work process. The quality of work is not compromised with speed, this plan won’t hurt quality over the quantity of work done, thus plan increases both effectiveness and efficiency. In addition, it will motivate employees to disclose system concerns that may hinder customer satisfaction therefore increases better relationships with employees. Finally, continued improvement is rewarded and working in teams encourages innovative, new ideas which in turn could increase quality.

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However, this plan does not motivate the outstanding employees to increase their productivity because it focuses on employees who are performing below standards, potential conflicts between employees based on different perspectives may occur. Most importantly, it does not reward on an output basis. In addition, this plan may impair quantity for the increase in the quality of work done and cutoff issues such as deciding which period to allocate a complaint when a shipment is made in one period but the complaint is made in subsequent periods. Neither this plan consider the seasonality of the company. The number of complaints can be a very subjective measure because it focuses solely on customer complaints ignores all the other dimensions of customer satisfaction. Payout ranges have the tendency to equalize unequal results. This plan could sacrifice quantity for quality or visa versa. The separate cheque disbursements could be a de-motivating measure for employees that feel they performed above standards but a subjective measure refutes this claim.

Profit Sharing Plan: equals in size to 15% of pretax profits after a deduction equal to 10% of the beginning – of –year net worth allocated to the business unit. At end of each year the profit –sharing pool was allocated to employees, pro rate, based on their individual share of total wages and salaries in the business unit. Plan aligns company’s strategic goal of increasing profits and motivates employees to pursue that common goal since all employees have an impact on the profits of the company. This plan encourages employees to discuss new initiatives and improvements more proactively with management. It encourages teamwork which encourages both effectiveness and efficiency by employees.

But this plan fails to acknowledge individual performance, since the reward is based on the collective performance of all the employees; therefore this plan ignores the performance of the unproductive employees. If the company does not earn profits due to the activities beyond the control of employees, the employees do not earn anything. Reward is based on the financial results, not the performance results. Percentage is fixed at the beginning of the period, thus it does not give the employees any incentive to increase sales beyond certain levels. Hostility may be created between employees and the management on different perspectives in running the daily operations. Allocating the bonus based on salary and wages eliminates equality of effort in the division. For example, an employee at the lower end of the pay scale would receive a smaller bonus than those above, even if a major decision that increased profits was his alone.

Individual Incentive Plans: usually contained incentives ranging from 10 to 40 percent of base pay. It is designed into three main components, the order accuracy, order acknowledgement and turnaround, and sales growth. The higher the results for each category, the higher the bonus payout. The individual incentive plan is used chiefly for sales and supervisory employees. Easy to track individual performance of sales people. Plan encourages sales growth and profitability of the company. Plan values customers by promoting faster order turnaround. Plan records performance of sales and supervisory employees. Plan promotes quality over the quantity of the sales meetings. Helps the company evaluate, whether there is a need to re-train the employees. Assists the company in retaining the profitable employees and compensating them accordingly. Helps the company to decide whether there is a need for disciplinary action. Can be tailored to compensate exceptional performers. Emphasizes the quality of a sales meeting as opposed to the quantity of sales meetings.

However, performance measures are more advantageous for certain departments such as sales and supervisory personnel. An ineffective performance measure such as order turn around involves performance of other departments for which sales people do not have any control over. Plan may create hostility among the sales people and the other department controlling order turn around if the details of the incentive reward are not kept confidential. If order accuracy is less than 95%, no bonus will be awarded to the participant. No bonus for staff personnel in the current year.

Questions 1-B. Evaluate the annual and long-term incentive compensation plans for senior management (in place and as modified during 1983 – 1992), what problems do these plans solve? What problems do they create?

AICP: The SICP will motivate managers to increase ROA and sales, which aligned the interest of managers with the strategy of the company. It will also reduce the possibility of manipulating the performance by the management, because the comprehensive measures are based on the performance of both ROA and Sales growth; The translation from reaching the goal to the bonus is clear, manager could read directly from the matrix the factor by which his/her target bonus would be multiplied to determine the actual bonus he/she would receive. So managers can use benchmarking to communicate their expected level of profit

However, mangers may only focus on sales growth and profit but ignoring other factors, such as cost control, after-sales services; therefore managers may shift more attention to high profit customers but ignored lower profit customers who could be long-term profitable, which might result the loss for both of managers and the company; it may also ignore the outstanding performance as it is an average percentage payment for all senior mangers in a business unit.

LTIP: In the long run, it is good to the company the plan focused more attention on the result of the long term in 5 years, even if with one or two bad years performance the manager could still get a payment; so LTIP motivates the managers to pay attention to long-term effectiveness and pay continuous efforts; Since the bonus was cumulative for five years, a huge bonus could be an attractive incentive for managers to work harder in stand view of organizational behavior.

But the complexity of the plan may be difficult to understand which will give managers more leisure time since one or two bad year would not effect the bonus significantly. In addition, this plan will provide rooms for management to manipulate the book value of the share as a result, the historical book value may not reflect the current market value which results the bonus amount biased.

New LTMIP: New LTMIP will not only align the interests of shareholder’s and the management but also can be flexibly adjusted when changes of responsibility or positions occurs as equitable adjustment will be made, in addition, LTMIP reflects more accurately the current period’s performance of managers. Finally, It takes consideration of extraordinary events and allows subjective adjustment.

New LTMIP lacks of full consideration of economic reasons or unforeseen problems and other critical factors, such as inventory and accounts receivable control, in addition, may forgo profitable long-term projects while taking short-term higher ROE investment. Last, it may causes accounts being cut-off: increased the sales figure by transferring next year’s sales to current year.

Proposed New EVAIS: The new system was designed to more closely align the interests of management and shareholders. EVA may aligned the interests of management and shareholders much closer, and could serve the overall strategy of the company better than the existing system in both of short term and long term.

However, the EVA system is more time consuming and complicated because it needs a lot of adjustment and data analysis based on the financial statement. Bonus was affected by many factors, and some of the factors, such as Performance Unit Value, could make managers exhausted and frustrated. Because whenever the actual EVA was lower than or equal to the base line EVA, the bonus could be lower. Managers will be misguided to pursue the investment in the good projects whenever the projects will increase EVA, but ignore the cash flow problem in short term. Some numbers such as $1625000 of sensitivity factor was set subjectively; it is hard to judge its reasonability. In this case, this could lessen the effectiveness of the incentive plan.

Recommendations: The base salary for the next 5 years should be frozen. Duckworth Industries should also kept the bonus units constant for the next 5 years. The baseline EVA should be set at least 5% higher than the projected 1993 EVA and should be adjusted using the proposed 50% annual target adjustment factor as illustrated in the case. Base unit value should be set at 50 cents per unit for the Worth Corporation so it will provide managers with the limited leverage of not meeting the targets in contrary to the leverage of $1 and 80 cents thereafter since it seems to be quite lenient on management. EVA Bonus Sensitivity Factor should also be adjusted as the sales increase relative to the division. The new EVA system is oversight by the top executives (primarily Mr. Duckworth and the Board of Directors), and it should be modified because of the relative complexity and modernization of this system, many risks for the company increase that could ultimately lead to problems if not monitored appropriately.