Synergy Ltd’s incentive plan is based on a shared bonus pool. Return on investment (ROI) is used as the main performance metric and is calculated as:

Operating profit before tax ÷ Assets at gross book value

Receipt of the incentive is dependent on the achievement of annual ROI targets. These targets were set in consultation with division managers. Moreover, the senior management team is rewarded on the basis of organisational ROI. The amount of bonus received by managers is determined as follows. The bonus pool is determined as:

$100 000 + 10% of increases in annual combined ROI

The bonus pool is shared 15 per cent to senior management (shared equally among 10 managers on the basis of organisational ROI), 50 per cent to divisional managers (shared among three managers according to divisional ROI) and 35 per cent to managers within the divisions (shared among 12 managers according to divisional ROI). The bonus payment is in the form of cash. While some members of the management team have expressed concerns about the use of ROI as the key performance metric, the CEO is intent on keeping things simple and believes that ROI is a good summary measure on which to base senior management and divisional manager rewards.

One of the senior managers, Sonia Lee, has become persistent in her objections to the current bonus scheme. She feels the scheme needs to reflect shareholder interests with suitable measures at each level of the company that reflect managers’ span of control and the right mix of incentives.

Required

You have been asked to advise the board of Synergy Ltd on a possible new incentive plan that addresses the concerns of Sonia Lee. Prepare a report outlining the detail of your incentive plan. Make sure you explain how your plan addresses Sonia’s concerns.