13-4A. (Incentive compensation) The management of Seligman Manufacturing has decided to die employee compensation to EVA performance of the firm. The firm's CFO, Virginia Whitten, is to make a presentation to the CEO and board of directors illustrating how the program will work under both an unbounded and a bounded plan for awarding incentive compensation. To illustrate the two plans, Virginia has chosen to use the compensation for a typical plant manager. Under the proposed compensation plan, a plant manager would receive a base pay level of $100,000 plus incentive pay equal to 20 percent of this base pay if the firm hits its EVA performance targets exactly.

a. Calculate the plant manager's incentive pay and total compensation for actual EVA per- formance of $15,000,000; $20,000,000; and $30,000,000 if the target level of EVA per- formance is set at $20,000,000.

b. Now estimate the plant manager's incentive pay and total compensation for the same three levels of EVA performance and target EVA but with a bounded incentive pay sys- tem that has a floor equal to 80 percent of the target performance level and a cap at 120 percent. What are the incentive effects for the plant inanager of placing the floor and cap on target performance when determining the incentive pay?