Division manager’s compensation, risk sharing, incentives (continuation of 24—30).

The management ofMason Industries is considering the following alternative compensation

/Arrangements for Maureen Grieco, the division manager ofJSD:

Make Grieco’s compensation a fixed salary without any bonuses. Mason’s management believes that one advantage ofthis arrangement is that Grieco will be less inclined to reject future investments just because of their impact on ROI or RI.

Make all of Grieco’s compensation depend on the division’s RI. The benefit of this arrangement is that it creates incentives for Grieco to aggressively seek and accept all pro¬

posals that increase J$D’s RI.

Evaluate Grieco’s performance using benchmarking by comparing JSD’s RI against the RI achieved by managers of other companies that also manufacture and sell go-carts and recreational vehicles and have comparable levels of investment. Mason’s management believes that the advantage of benchmarking is that it focuses attention on Grieco’s per¬

formance relative to peers rather than on the division’s absolute performance.

Required 1. Assume Grieco is risk adverse and does not like bearing risk. Using concepts of performance evaluation described in this chapter, evaluate each of the three proposals that Mason’s man¬

agement is considering. Indicate the positive and negative features of each proposal.

2. What compensation arrangement would you recommend? Explain briefly.