Industrial Electronics, Inc. Acctg Case Essay

1132 Words Jan 26th, 2008 5 Pages
1. The first point about the current bonus system is one that can be viewed as either a pro or a con – the fact that the bonuses are based on a company-wide performance. On the positive side, a bonus structure based on overall company performance displays a unitary goal as the main objective. This means that either everyone in the company enjoys the fruits of success or nobody does. Negatively, this also means that if a specific division has a great year, but the overall company doesn't perform that well, the people involved with the excelling division aren't rewarded financially for all of their hard work.

The current bonus system also only allows for bonuses to be distributed if there are profits more than 10% (after taxes) in
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The difference is then taken from the actual numbers and the economic profit objective. This difference is what's used to calculate the bonus. For every $100,000 of economic profit above the economic profit objective, the division is to earn an additional 5% of salary. The equation for this would be: .5 + (x * .05) where x is hundred thousands of dollars of profits above the economic profit objective. This step is shown in Table 2. The bonus percentage for Division B is dropped to 150% since that is the maximum. The average bonus across the five divisions is 73%.

Table 1
Division Profit Difference Assets Difference Economic Profit Objective
A $150 ($1,000) $40
B $3,500 ($1,000) $40
C $250 ($200) ($70)
D $400 $200 ($1,180)
E ($500) ($200) $360

Table 2
Division Economic Profit Objective Actual Economic Profit Difference Bonus
A $40 $310 $270 60%
B $40 $3,660 $3,620 230% -> 150%
C ($70) $204 $274 60%
D ($1,180) ($804) $376 65%
E $360 ($116) $476 30% avg % bonus 73%

3. The proposed bonus system seems to be better than the currently established bonus system overall. However, it does have its flaws. One major flaw in the proposed bonus system is that it is rooted in the budgeted profits, assets, and economic profit objective. Basically, managers in the
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