ROI, Goal-Congruency Issues As indicated in the chapter, ROI is well entrenched in business prac- tice. However, its use can have negative incentive effects on managerial behavior. For example, assume you are the manager of an investment center and that your annual bonus is a function of achieved ROI for your division. You have the opportunity to invest in a project that would cost $250,000 and that would increase annual operating income of your division by $25,000. (This level of return is considered acceptable from top management's standpoint.) Currently, your division gen- erates annual operating profits of approximately $300,000, on an asset base (i.e., level of invest- ment) of $2,000,000.

Required

1. What is the current return on investment (ROI) being realized by your division (i.e., before considering the new investment)?

2. What would happen to the near-term ROI of your division after adding the effect of the new investment?

3. As manager of this division, given your incentive-compensation plan, would you be motivated to make the new investment? Why or why not?

4. Can you offer any recommendations for improving the design of the incentive-compensation plan under which you are working? That is, can you think of a plan that would result in increased goal congruency between your incentives and the goals of the company?