Question: Risk sharing, incentives, benchmarking, multiple tasks. Wonkies, Inc. is a large company that owns fast-food restaurants, has a soft drink division, and a snack division. Wonkies, Inc. corporate management gives its division managers considerable operating and investment autonomy in running their divisions. Wonkies, Inc. is considering how it should compensate Mark Hamm, the general manager of the snack division.
¦ Proposal 1 calls for paying Hamm a fixed salary.
¦ Proposal 2 calls for paying Hamm no salary and compensating him only on the basis of the division's RI, calculated based on operating income before any bonus payments.
¦ Proposal 3 calls for paying Hamm some salary and some bonus based on RI.
1. Evaluate the three proposals, specifying the advantages and disadvantages of each.
2. Wonkies, Inc. competes against Galaxy Industries in the snack business. Galaxy is approximately the same size as the Wonkies snack division and operates in a business environment that is similar to Wonkies. The top management of Wonkies, Inc. is considering evaluating Hamm on the basis of his snack division's RI minus Galaxy's RI. Hamm complains that this approach is unfair because the performance of another company, over which he has no control, is included in his performance-evaluation measure. Is Hamm's complaint valid? Why or why not?
3. Now suppose that Hamm has no authority for making capital-investment decisions. Corporate management makes these decisions. Is RI a good performance measure to use to evaluate Hamm? Is RI a good measure to evaluate the economic viability of snack division? Explain.
4. The salespeople for the snack division of Wonkies, Inc. are responsible for selling and providing customer service and support. Sales are easy to measure. Although customer service is important to the snack division in the long run, it has not yet implemented customer-service measures. Hamm wants to compensate his sales force only on the basis of sales commissions paid for each unit of product sold. He cites two advantages to this plan:
a. It creates strong incentives for the sales force to work hard, and
b. the company pays salespeople only when the company itself is earning revenues. Do you agree with this plan? Why or why not?