Compensation Pools; Residual Income; Review of Chapter Great Brands Inc. (GBI) is a retailer of consumer products. The company made two acquisitions in previous years to diversify its product lines. In 2008, GBI acquired a consumer electronics firm producing computers. GBI now (2010) has three divisions: consumer electronics, cameras, and computers. The following information (in thousands) presents operating revenue, operating income, and invested assets of the company over the last three years.
|
Consumer Electronics
|
Revenue
|
Income
|
Assets
|
|
2008
|
$115,400
|
$14,560
|
$66,356
|
|
2009
|
110,450
|
8,900
|
45,750
|
|
2010
|
123,500
|
11,200
|
51,250
|
|
Cameras
|
|
|
|
|
2008
|
45,600
|
1,950
|
22,500
|
|
2009
|
38,500
|
1,350
|
22,400
|
|
2010
|
49,800
|
2,100
|
22,200
|
|
Computers
|
|
|
|
|
2008
|
98,900
|
2,350
|
11,250
|
|
2009
|
92,500
|
1,650
|
10,800
|
|
2010
|
106,450
|
2,675
|
11,200
|
The number of executives covered by GBI's current compensation package follows:
|
|
2008
|
2009
|
2010
|
|
Consumer Electronics
|
300
|
350
|
375
|
|
Cameras
|
40
|
40
|
37
|
|
Computers
|
120
|
140
|
175
|
The current compensation package is an annual bonus award. Senior executives share in the bonus pool, which is calculated as 10 percent of the company's annual residual income. Residual income is defined as operating income minus an interest charge of 8 percent of invested assets.
Required
1. Use asset turnover, return on sales, and ROI to explain the differences in profitability of the three divisions.
2. Compute the bonus amount to be paid during each year; also compute individual executive bonus amounts.
3. If the bonuses were calculated by divisional residual income, what would the individual bonus amounts be?
4. Discuss the advantages and disadvantages of basing the bonus on GBI's residual income compared to divisional residual income.