Virgo plc is considering introducing a system of EVA® and wants its managers to focus on the longer term rather than simply focus on the year-to-year EVA® results. The business is seeking your advice as to how a management bonus system could be arranged so as to ensure that the longer term is taken into account. The business is also unclear as to how much of the managers’ pay should be paid in the form of a bonus and when such bonuses should be paid. Finally, the business is unclear as to where the balance between individual performance and corporate performance should be struck within any bonus system.

The chief financial officer has recently produced figures that show that if Virgo plc had used EVA® over the past three years, the results would have been as follows:

Year 1 £25 million (profit)

Year 2 £20 million (loss)

Year 3 £10 million (profit)

Required:

Set out your recommendations for a suitable bonus system for the divisional managers of the business. (This topic was not directly covered in the chapter, but try to use the broad principles that you have learned to answer the question. There is no single correct answer.)

AppendixLO1