Advanced: Comments on an existing performance measurement and bonus system and recommendations for improvement 1. You are
Question:
Advanced: Comments on an existing performance measurement and bonus system and recommendations for improvement 1. You are the group management accountant of a large divisionalised group.
There has been extensive board discussion of the existing system of rewarding Divisional General Managers with substantial bonuses based on the comparison of the divisional profit with budget.
The scheme is simple: the divisional profit (PBIT) is compared with the budget for the year. If budget is not achieved no bonus is paid. If budget is achieved a bonus of 20% of salary is earned. If twice budgeted profit is achieved, a bonus of 100% of salary is paid, which is the upper limit of the bonus scheme. Intermediate achievements are calculated pro rata.
The Finance Director has been asked to prepare a number of reports on the issues involved, and has asked you to prepare some of these.
He has decided to use the results for Division X as an example on which the various discussions could be based. A schedule of summary available data is given below.
Division X manufactures and sells branded consumer durables in competitive markets. High expenditure is required on product development and advertising, as the maintenance of market share depends on a flow of well-promoted new models.
Reliable statistics on market size are available annually. Based on the market size for 2000, where stronger than anticipated growth had occurred, a revised market estimate of 165 000 units for 2001 is agreed by group and divisional staff in May 2001. This is a significant increase on the esti¬ mate of 150 000 units made in May 2000 and used since.
The Divisional General Manager has commen¬ ted that action now, almost half way through the year, is unlikely to produce significant results during this year. However, had he known last year, at the time of producing the budget, that the market was growing faster, he could have taken the necessary action to maintain the strategic plan market share. The actions would have been • cutting prices by £10 per unit below the price at present charged and used in the latest estimate for 2001, • increasing marketing expenditure by £300000 compared with the strategic plan.
The Group Managing Director, commenting on the same data, said that the Divisional General Manager could have maintained both strategic plan market share and selling prices by an alternative approach.
The approach, he thought, should have been • maintaining expenditure on product development and marketing at 20% of sales over the years, • spending his time controlling production costs instead of worrying about annual bonuses.
You are required:
(a) to analyse and comment on the results of Division X, making appropriate comparisons with Budget, with Plan and with new available data. Present the results in such a form that the Board can easily understand the problems involved; (17 marks)
(b) to comment on the advantages and problems of the existing bonus system for the Divi¬ sional General Manager and the way in which the present bonus scheme may motivate the Divisional General Manager; (8 marks)
(c) to make specific proposals, showing calcula¬ tions if appropriate, for an alternative bonus scheme, reflecting your analysis in (a).
(8 marks)
A non-executive director has commented that he can understand the cash for linking executive directors’ rewards to group results. He is not convinced that this should be extended to divi¬ sional managers, and certainly not to senior managers below this level in divisions and head office.
(d) Explain and discuss the case for extending bonus schemes widely throughout the organ¬ isation. (7 marks)
(Total 40 marks) CIMA Stage 4 Management Accounting -
Control and Audit
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