Salt Water Ltd is a large and successful manufacturer of engines. The company consists of two divisions the Automotive Engine Division and the Outboard Motor Division. Salt Water has recently acquired a company which will become a third division. The new Couch Division is a small manufacturer of lawnmower motors. It has been owned and managed by the one person for 40 years. The prior owner treated all employees as part of his family. The company was noted for the lack of a 'them and us' attitude between employees and management, and there was free and open communication between all staff. Unfortunately, Couch is not a strong performer; the lawnmower market is in decline and profits have slipped.

Salt Water is known for its modern management systems and would like all managers at Couch to participate in the performance-related pay system that is used in the other two divisions. The profits sharing plan applies to senior divisional managers only. It is based on placing 10 per cent of Salt Water's profits before interest and income tax into a pool, which is then shared by the senior divisional managers in direct proportion to their base salaries. The senior managers in the two original divisions received bonuses of 11 per cent and 12 per cent of their salaries for the last two years before the acquisition of Couch.

The profit results for the first financial year following the acquisition of the Couch Division, are as follows:

Senior management salaries included in the above costs, and divisional assets at the end of that year, are as follows:

Prior to the acquisition by Salt Water all Couch employees including the senior managers, participated in a gainsharing program. Under this program, the financial impact of improvements in labour productivity and delivery performance were quantified each quarter, and 50 per cent of this amount was accumulated in a pool. At the end of each year, each employee received an equal share of the pool. The scheme was discontinued when Salt Water purchased Couch.
Required:
1. Which division has the best performance in the first year after the acquisition?
2. Determine the bonus pool available for that year, and calculate the percentage bonus that each senior manager would receive.
3. Discuss the behavioural problems that could arise among the senior managers of the Outboard and Automotive divisions as a result of the bonuses.
4. Discuss the behavioural problems that may arise within the Couch Division from the changes in the performance related pay system.
5. Suggest some changes that could be made to improve Salt Water's performance related pay system and alleviate some of the problems identified in requirements 3 and 4.

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Outboard Automotive Couch $31,600,000 S42,000,000 Sales revenue $9,500,000 Cost of goods sold 10,000,000 24,000,000 4,500,000 Gross margin $21,600,000 S18,000,000 S5,000,000 Administrative costs 7,400,000 11,800,000 3,600,000 Marketing and selling costs 7,400,000 6,200,000 1,200,000 Total costs $19,200,000 $13,600,000 $4,800,000 Profit before interest and taxes $2,400,000 $200,000 $4,400,000 Outboard Couch Automotive Senior management salaries $4 000 000 8 000 000 $1 400 000 1 600 000 $2 800 000 Divisional assets 8 000 000