AB3D Industries is a company with six manufacturing facilities that produces a variety of plastic-based children’s toys. The company was founded in 1983 by Edward Pistrom, who served as the chief executive officer until 1995. Since then, several CEOs have filled the post quite successfully—continuing to meet the demand for safe and durable children’s toys. AB3D Industries has approximately 2,400 employees throughout the facilities. Each facility is run by a general manager and has staff who address the relevant employee and customer needs of those in key positions. The general managers of each facility report to the corporate staff, which consists of the CEO (chief executive officer), the COO (chief operating officer), and the directors of Human Resources, Legal, Sales, and Marketing. Since its founding, the company has maintained a healthy rate of growth in sales as well as in financial returns related to return on investments (ROI) and return on assets (ROA). Despite the prosperous history of AB3D, over the past four years, the company’s performance has declined. Of the six manufacturing facilities, four have failed to post any gains in productivity or revenue, while two have posted slight gains in productivity despite diminished levels of revenue at the facilities. Put simply, the performance of the facilities and the company as a whole has been poor. The CEO for the past three years was fired due to this poor performance. Over the past three months, a consulting company has worked with AB3D top management to identify potential candidates for the CEO position. After a lengthy search and extensive interviews, AB3D is excited about the prospect of one candidate in particular—Andrew Reason. Andrew essentially grew up in this industry. Over the past 16 years, he has worked his way up from the manufacturing floor through operations and marketing positions to assume a director of operations position at a competing firm. Based on numerous discussions, it is clear that Andrew is interested in the prospect of helping turn around the performance of AB3D Industries. His main concern is that AB3D must be able to provide a compensation package compelling enough for him to take on the CEO role. The consulting company has suggested that the market average for base compensation for CEOs in this industry should be approximately $1,000,000. In addition to base pay, CEOs in this industry expect lucrative short-term and long-term incentives to reward them for exceptional performance. What should you offer to this top candidate?

Questions

1. What factors are you considering in setting the executive compensation package for this potential hire?

2. What compensation/incentive package would you recommend for the new CEO? Be sure to identify the base pay as well as the forms of short-term and long-term incentives you would recommend. Why would you recommend this package?

3. What implications, if any, would this package have for the workers at AB3D Industries?

4. What would you do to address any concerns by the workers with your executive pay plan?