Executive Compensation; Teams; Ethics Universal Air Inc. supplies instrumentation components to airplane manufacturers. Although only a few competitors are in this market, the competition is fierce.
Universal uses a traditional performance incentive plan to award middle-management bonuses on the basis of divisional profit. Recently, Charles Gross, chief executive officer, concluded that these objectives might be better served with new performance measures. On January 1, 2010, he assigned his executive team of top-level managers to develop these new measures.
The executive team conducted a customer survey. Although Universal has always prided itself on being on the technological forefront, the survey results indicated technology to be a low priority for customers, who were more concerned with product quality and customer service. As a result, the exec- utive team developed 30 new criteria to measure middle-management performance and directed the controller to develop the necessary monthly reports and graphs to report on these new measures. Then the executive team announced to middle managers that these new indicators would be used to evalu- ate their performance. The managers were not enthusiastic and complained that some measures were influenced by the performance of other departments that they could not control. Over the next few months, customer complaints increased, and a major customer chose a competitor over Universal.
Upon seeing these results, Charles decided to review the new process. In a meeting with execu- tive and middle managers, he emphasized that the new measures should help balance the company's performance between increased customer value and improved operating process efficiency. He set up two cross-functional teams of executives and middle managers to develop a second set of new measures: one to evaluate new product development and the other to evaluate the customer order and fulfillment process. Both teams are to focus on cost, quality, and scheduling time.
Richard Strong, quality inspection manager, is the brother-in-law of John Brogan, cost accounting manager. On June 1, John telephoned Sara Wiley, the purchasing manager at Magic Aircraft Manufacturing Inc., one of Universal's major customers. Brogan said, "Listen Sara, we're jumping through all these hoops over here to measure performance, and management seems to be changing the meas- ures every day. It was so easy before, getting a bonus based on the bottom line; now we have to worry about things out of our control based on how the customer perceives our performance. Would you do me a favor? If you have any complaints, please have your people call me directly so I can forward the complaint to the right person. All that really matters is for all of us to make money." In actuality, Richard was the only person to whom John reported the customer complaints that Sara offered.
Required
1. For Universal Air Inc. to remain competitive, should it implement the second set of new performance measures? Identify for the company:
a. At least three customer value-added measures.
b. At least three process-efficiency measures.
2. Identify at least three types of employee behaviors that Universal can expect by having middle manage- ment participate in the development of the second set of new performance measures.
3. Describe what executive management at Universal should do to ensure the effectiveness of the cross- functional teams.
4. Referring to the specific standards for ethical conduct by a management accountant (Chapter 1), con- sider whether John Brogan's behavior is unethical.