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Harwood Medical

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Problem Statement Harwood Medical Instruments PLC (HMI) manufactures specialty medical instruments. The incentive compensation scheme was based solely on operating profit and did not take into account any other key performance indicators. HMI instituted a new bonus plan that takes into an account a more balanced scorecard approach and is based on operating profit and other key performance indicators. The problem in this case is whether the new bonus system is successful and whether it is the most appropriate incentive program for the company.
Case Data Harwood Medical Instruments PLC is based outside Birmingham, England and manufactures specialty medical instruments. The company is organized into nine separate divisions each run by
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Scrap and Rework Cost Reduced by excess of scrap and rework costs over 1% of operating profit.
Customer Satisfaction Ratings Reduced by $5,000 if average customer satisfaction ratings were below 90%
What if final amount is negative No bonus is paid and it is not carried forward

Exhibit 3 – Division Managers Bonus for half-year period under Alternative 3
Base Bonus 1% of operating profits
On Time Deliveries Increased by $20,000 if over 97% of deliveries are on time.
Increased by $10,000 if 95% to 97% of deliveries are on time.
No increase if on time deliveries are less than 95%
Sales Returns Increased by $10,000 if sales returns are less than or equal to 1% of sales.
Decreased by 50% of the excess of sales returns over 1% of sales
Patent Application Increased by $2,000 for every patent application filed.
Scrap and Rework Cost Reduced by excess of scrap and rework costs over 1% of operating profit.
Customer Satisfaction Ratings Increased by $20,000 if average customer satisfaction ratings are above 95%. Increased by $10,000 if average customer satisfaction rating is above 90%. Reduced by $5,000 if average customer satisfaction ratings were below 90%
Special Indicator determined and specific for individual divisions. $20,000 if objective is met.
For the Surgical Instruments Division the agreed indicator is 95% customer satisfaction.
For the Ultrasound Diagnostic Division the
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