Industrial Electronics Inc Accounts Case Essay

933 Words Mar 6th, 2010 4 Pages
Case 23-2: Industrial Electronics Inc.

Issue: Evaluate the proposed bonus system.

Background: “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.

KSF • Innovation. • Good cost control due to price competition.

Internal Environment • Industrial Electronics Inc. sells a wide range of electronic equipment. (Like EVERY other case!!!) • $8 Billion in sales. • High-tech industry makes it difficult to forecast, since it’s a volatile industry. • Goal is to maximize shareholder value.

External Environment • Competes on new/innovative products and also price. • We infer there is an
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As an example: 50% / 5% = 10*$100,000 = $1,000,000. If results are $1,000,000 below target, they get no bonus. That’s big difference between budget and actual before no bonus is given!!! • The MAXIMUM bonus is 150%...150% / 5% = 30*$100,000 = $3,000,000 above targets.

Pros of Proposed System • Reward is linked to individual performance, which is good when there is no interdependence among units. • The measure uses a total productivity #: Sales – expenses and asset use. • The operating targets are separately estimated for each unit, which means a better reflection of their potential. This is equitable and also achievable, and a source of motivation and commitment for managers.

Cons of Proposed System • Using Operating Income is a short-term measure, as above, which could compromise innovation. • We wonder why cash is included in operating assets – it seems arbitrary. • Net Book Value as a measure of assets in this calc is a poor mechanism, given that over time, NBV decreases naturally (given depreciation) which makes the return greater…and this discourages asset replacement. • 12% as a cost of capital for each unit isn’t realistic, as it would naturally differ from unit to unit given the difference in assets employed..also, if the 12% is constant, this doesn’t actually reflect TRUE cost of capital. • Setting budgets in this industry is difficult given the

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