Problem - Profit-sharing plan at oechst Celanese
Hoechst Celenase, a pharmaceutical manufacturer, has used a profit-sharing plan, the Hoechst Celanese Performance Sharing Plan, to motivate employees. To operationalize the plan, the Hoechst Celanese executive committee set a target earnings from operations (EFO). This target was based on the company's business plans and the economy's expected performance. The performance sharing plan also used two other critical values: the earnings from operations threshold amount and the earnings from operations stretch target. The targets for 1994 are shown here:
Threshold Target Stretch
EFO EFO EFO
$250M $320M $390M
Earnings from Operations
The plan operates as follows. If earnings from operations fall below the threshold value, there is no profit sharing. If earnings from operations lie between the threshold amount and the target, the profit-sharing percentage is prorated between the threshold award of 1% and the target payment of 4%. For example, if earnings from operations were $285 million, the profit-sharing percentage would be 2.5%:
Profit-sharing percentage=1% +{3%*[(285-250)/(320-250)]}=2.5%
Profit-sharing pool=2.5%*$285,000=$7,125,000
If earnings from operations are between the target and the stretch target, the profit-sharing percentage is prorated between the target payment of 4% and the stretch-sharing payment of 7%. For example, if earnings from operations were $350 million, the profit-sharing percentage would be 5.29%, and the profit-sharing pool would be $18.5 million:
Profit-sharing percentage=4%+{3%*[(350-320)/(390-320)]}
5.28571%
Profit-sharing pool=5.28571%*$350,000,000=$18,500,000
If earnings from operations equal or exceed the stretch target level, the profit-sharing pool would be $27.3 million:
Profit-sharing pool=7%*$390,000,000=$27,300,000
a. List, with explanations, what you think are desirable features of the Hoechst Celanese Performance Sharing Plan.
b. List, with explanations, what you think are the undesirable features of the Hoechst Celanese Performance Sharing Plan.
c. The EFO for 1994 was $332 million. Compute the size of the profit-sharing pool.
d. In 1995, th Performance Sharing Plan parameters were threshold Efo-$420 million; targt EFO - $490 million; and stretch EFO - $560 million. What do you think of the practice of raising the parameters from one year to the next?