Harwood Medical Instruments PLC (HMI), based just outside of Birmingham, England, manufactured specialty medical instruments and sold them in market niches that were becoming increasingly competitive and price sensitive. The company was organized into nine divisions each run by a general manager. Over the years HMI had grown both organically and by acquisition. Six of the divisions had been acquired by HMI within the past decade.
All of HMIs divisions sold medical products to hospitals, laboratories and/or doctors, so the need for product quality and reliability was high. The divisions varied significantly, however, in terms of the degree to which their success depended on, for example, development of new products, efficiency of production, and/or customer service.
Results for two representative HMI division for the year 2007, the first year under the new bonus plan, are shown in Exhibit 1. The Surgical Instruments Division (SID) sold a variety of surgical instruments, including scissors, scalpels, retractors, and clamps. The Ultrasound Division (Ultrasound) sold and serviced ultrasound probes, transducers, and diagnostic imaging systems. In 2006, the total annual bonuses of the managers of SID and Ultrasound were approximately £85,000 and £74,000, respectively.

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EXHIBIT 1 Harwood Medical Instruments PLC Operating results for the Surgical Instruments and Ultrasound Diagnostic Equipment Divisions, 2007 (E in 000s) Surgical Instruments Division Ultrasound Diagnostic Equipment Division 1st half of 2007 E42,000 £4,620 95.4% E4S0 2nd half of 2007 1st half of 2007 2nd half of 2007 Sales Operating profit On-time deliveries Sales returns Patent applications filed Scrap and rework costs Customer satisfaction (ave.) E44,000 £4,400 97.396 E420 £28,600 E3,420 98.2% E291 £29,000 E4,060 94.6% £289 EST. 78% E45.0 89% E39.7 81% 238.2 91%