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To Renege or Not to Renege? Federico Garcia, Vice president of sales for Puget Sound Building Materials, a company based in Tacoma, Washington, wasn’t all that surprised by what company president Michael Otto and CFO James Wilson had to say during their meeting that morning. Last year, launching a major expansion made sense to everyone at Puget. a well-established company that provided building materials, as well as manufacturing and installation services, to residential builders in the Washington and Oregon markets. Puget looked at the record new housing starts and decided that it was time to more into the California and Arizona markets, especially concentrating on San Diego and Phoenix, two of the hottest housing markets in the Country. Federico carefully hired promising new sales representatives and offered them hefty bonuses if they reached goals set for the new territory over the following 12 months. All representatives had performed well, and three of them had exceeded Puget's goal—and then some. The incentive system he’d put in place had worked well. The sales reps were expecting handsome bonuses for their hard work. Early on, however, it became all too Clear that Puget had seriously underestimated the time required to build new business relationships and the Costs associated with the expansion, a mistake that was already eating into profit margins. Even more distressing were the most recent figures for new housing starts, which were heading in the wrong direction. As Michael said,” Granted, it’s too early to tell if this is just a pause or Start of a real long-term downturn. But I'm worried, if things get worse, Puget could be in real trouble." James looked at Federico and said,” Our lawyers built enough contingency clauses into the sales reps’ contracts that we’re not really obligated to pay those bonuses you promised. What would you think about not paying them?” Federico turned to the president, who said,” Why don’t you think about it, and get back to us with a recommendation?” Federico felt torn. On the one hand, he knew that the CFO was correct. Puget wasn’t, strictly speaking, under any legal obligation to pay out the bonuses, and the eroding profit margins were a genuine cause for concern. The president clearly did not want to pay the bonuses. But Federico had created a first-rate sales force that had done exactly what he’d asked it to do. He prided himself on being a man of his word-someone others could trust. Could he go back on his promises? Recommend to the president that a meeting be arranged with the sales representatives entitled to a bonus and tell them that their checks were going to be delayed until Puget’s financial picture clarified. The sales reps would be told that the company had a legal right to delay payment and that it may not be able to pay the bonuses if its financial situation continues to deteriorate.

BuyFind

Management, Loose-Leaf Version

13th Edition
Richard L. Daft
Publisher: South-Western College Pub
ISBN: 9781305969308
BuyFind

Management, Loose-Leaf Version

13th Edition
Richard L. Daft
Publisher: South-Western College Pub
ISBN: 9781305969308

Solutions

Chapter
Section
Chapter 16, Problem 1ED
Textbook Problem

To Renege or Not to Renege?

Federico Garcia, Vice president of sales for Puget Sound

Building Materials, a company based in Tacoma, Washington, wasn’t all that surprised by what company president Michael Otto and CFO James Wilson had to say during their meeting that morning.

Last year, launching a major expansion made sense to everyone at Puget. a well-established company that provided building materials, as well as manufacturing and installation services, to residential builders in the Washington and Oregon markets. Puget looked at the record new housing starts and decided that it was time to more into the California and Arizona markets, especially concentrating on San Diego and Phoenix, two of the hottest housing markets in the Country. Federico carefully hired promising new sales representatives and offered them hefty bonuses if they reached goals set

for the new territory over the following 12 months. All representatives had performed well, and three of them had exceeded Puget's goal—and then some. The incentive

system he’d put in place had worked well. The sales reps were expecting handsome bonuses for their hard work.

Early on, however, it became all too Clear that Puget had seriously underestimated the time required to build new business relationships and the Costs associated with the expansion, a mistake that was already eating into profit margins. Even more distressing were the most recent figures for new housing starts, which were heading in the wrong direction. As Michael said,” Granted, it’s too early to tell if this is just a pause or Start of a real long-term downturn. But I'm worried, if things get worse, Puget could be in real trouble."

James looked at Federico and said,” Our lawyers built enough contingency clauses into the sales reps’ contracts that we’re not really obligated to pay those bonuses you promised. What would you think about not paying them?” Federico turned to the president, who said,” Why don’t you think about it, and get back to us with a recommendation?” Federico felt torn. On the one hand, he knew that the CFO was correct. Puget wasn’t, strictly speaking, under any legal obligation to pay out the bonuses, and the eroding profit margins were a genuine cause for concern. The president clearly did not want to pay the bonuses. But Federico had created a first-rate sales force that had done exactly what he’d asked it to do. He prided himself on being a man of his word-someone others could trust. Could he go back on his promises?

  1. Recommend to the president that a meeting be arranged with the sales representatives entitled to a bonus and tell them that their checks were going to be delayed until Puget’s financial picture clarified. The sales reps would be told that the company had a legal right to delay payment and that it may not be able to pay the bonuses if its financial situation continues to deteriorate.

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Chapter 16 Solutions

Management, Loose-Leaf Version
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