Although each of the 20 divisions performs at different levels, for simplicity, assume that three types of divisions exist: high performers, medium performers, and low performers with the following average frequency and performances:

Performance Measure Low Performers Medium Performers High Performers Number of divisions 6 10 4 Sales per employee $158,333 $175,000 $200,000 Customer-found defect rate 3.33% 2.00% 0.01%

Customer satisfaction score (1 to 100) 59 72 92 Return on investment (9.50)% 10.30% 40%

Required

a. Assume that each division manager is paid an annual salary of $75,000. Suppose if you were to propose an incentive plan that paid | percent of salary as a bonus for exceeding the industry’s 90th percentile performance, for each performance measure. What would be the average and total amounts of bonus compensation paid for the current levels of performance?

b. What would be the average and total amounts of bonus compensation paid if two low performers improved to the medium category and two medium performers improved to the high category?

What if all divisions were high performers?

c. Do you think the incentive plan in requirements

(a) and

(b) is a good plan or not? Would an incentive plan that paid bonus compensation for improvements in performance be a good idea? Explain.

d. Propose an alternative incentive plan that rewards absolute performance and relative improvement.