(10 points)

A major publicly held Aerospace company sells to private industry and government. The average size of any project sold could be up to 40 million. These projects could take as long as 24 months to complete. Along the way, Lead Project Engineers (LPEs) are responsible for tracking expenses against the expense budget. The expense budget is spread over the life of a project as best as can be forecasted, and expenses are charged monthly against the budget. If an LPE forecasts ahead of completion that they will be under budget upon completion, the leadership of the company wants to know well in advance. However, if projects are running under budget while still in process, but the LPE anticipates the budget underrun will eventually go away because of increased expenses yet to come, LPEs are asked to place those funds in reserve. Meaning, they are forecasting that the expense budget underrun is only temporary. The problem is that Lead Project Engineers are hesitant to announce they will underrun the expense budget until the very end of the project, even though they are almost certain when a project will underrun the budget well ahead of time. Therefore, in many cases, when the project is complete, there are significant funds still left in reserve that were not used.

LPEs are paid primarily on salary. However, they are also paid a small annual bonus at the end of the year based on the % of budget underruns for their projects completed during the year.

The company leadership had a number of significant strategic objectives, three of which were:

Rapidly increase spend on R&D to gain a competitive advantage

Increase earnings forecast/estimates accuracy in the eyes of investors and security analysts

Increase earnings

You are the Engineering Director and manage a team of LPEs. You are called into a meeting by the company leadership team, including the CEO and CFO. Because your team significantly underran budget for the year for your teams projects, with plenty left in reserve, you are happy to attend the meeting thinking they want to thank you for the good work. However, when you arrive at the meeting, the CEO says the following:

We are pleased that you underran budget, but we have some concerns.

Question (4 points):

The bonus plans for LPEs currently pays them 15% of base salary if their total annual expense on projects is 10% or more below their expense budget. How would you revise their plan?