Risk sharing, incentives, benchmarking, multiple tasks. The Dexter Division of AMCD sells car batteries. AMCO’s corporate management gives Dexter management considerable operating and investment autonomy in running the division. AMCD is considering how it should compensate Jim Marks, the general manager of the Dexter Division. Proposal 1 calls for paying Marks a fixed salary. Proposal 2 calls for paying Marks no salary and compensating him only on the basis of the division’s ROI, calculated based on operating income before any bonus payments. Proposal 3 calls for paying Marks some salary and some bonus based on ROI. Assume that Marks does not like bearing risk.

1. Evaluate the three proposals, specifying the advantages and disadvantages of each.

2. Suppose that AMCD competes against Tiara Industries in the car battery business. Tiara is approximately the same size as the Dexter Division and operates in a business environment that is similar to Dexter’s. The top management of AMCD is considering evaluating Marks on the basis of Dexter’s ROI minus Tiara’s ROI. Marks 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 Marks’s complaint valid? Why or why not?

3. Now suppose that Marks has no authority for making capital-investment decisions. Corporate management makes these decisions. Is ROI a good performance measure to use to evaluate Marks? Is ROI a good measure to evaluate the economic viability of the Dexter Division? Explain.

4. Dexter’s salespersons are responsible for selling and providing customer service and support. Sales are easy to measure. Although customer service is important to Dexter in the long run, it has not yet implemented customer-service measures. Marks 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 salespersons only when the company itself is earning revenues. Do you like his plan? Why or why not?