Management Control Systems and Incentives
Answer questions about the incentive program at company XZ. Provide rationale for your responses.
Part 1 Scenario
XZ is a Fortune 100 diversified conglomerate with operations in many industries around the world. Top management focuses on the annual earnings in evaluating the performance of division managers. Each year is a new challenge for division managers.
The incentive plan includes an annual bonus that ranges from 7 to 20 percent of division managers’ salaries. There is an element of relative performance evaluation in that annual earnings targets are based on how well companies in the same industry are performing. Once the target is set, it is not changed during the year.
Failure to meet a division’s targeted earnings has serious consequences for the division manager. The manager can lose some or all of the potential bonus and will find their job in jeopardy. Missing a target two years in a row generally means that the manager will be replaced.