13-4B. (Incentive compensation) The management of Shook Manufacturing has decided to tie employee compensation to EVA performance of the firm. The firm's CFO, Mark Shephard, is to make a presentation to the CEO and board of directors illustrating how the program will work undet both an unbounded and a bounded plan for awarding incentive compensation. To illustrate the two plans, Mark has chosen to use the compensation for a typical division manager. Under the proposed compensation plan, a division manager would receive a base pay level of $150,000 plus incentive pay equal to 30 percent of this hase pay if the firm hits its EVA performance targets exactly.

a. Calculate the division manager's incentive pay and total compensation for actual EVA performance of $20,000,000; $30,000,000; and $40,000,000 if the target level of EVA performance is set at $30,000,000.

b. Now estimate the division manager's incentive pay and total compensation for the same three levels of EVA performance and target EVA but with a bonnded 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 division manager of placing the floor and cap on target performance when determining the incentive pay?