Providing extrinsic rewards such as bonuses for achieving or exceeding expected levels of performance can be a powerful motivator. Not surprisingly, the use of extrinsic rewards is pervasive in companies. However, a key concern with using extrinsic rewards is that while they can motivate desired behaviour, they can also result in unintended consequences that may have negative effects on the company. Two examples of the use of extrinsic rewards follow below.
Example 1: A manager of a manufacturing bus iness division receives a significant bonus if her division meets or exceeds the profit target established at the beginning of the year. Assume she is responsible for all aspects of the value chain depicted in Exhibit 1-4.

Example 2: A salesperson at a large electronics retailer receives a commission on all customer sales. Assume each retail outlet has multiple sales staff all eligible for sales commissions and have some discretion to offer discounts to customers to secure a sale.

Required:
1. For each of the above examples, identify two unintended consequences that could have harmful effects for the company longer term that may arise as the result of the extrinsic incentives employed.
2. For each of the above examples, identify some controls a company could put in place to reduce the likelihood that the unintended consequences you identified in requirement l will occur.

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EXHIBIT 1-4 Business Functions Making Up the Value Chain Research and Development Product Design Manufacturing Marketing Distribution Customer Service