23-33 Executive compensation, balanced scorecard. Mercantile Bank recently introduced

bonus plan for its business unit executives.The company believes that current profitability and customer satisfaction levels are equally important to the bank's long-term success.As a result, the new plan awards a bonus equal to 1% of salary for each 1% increase in business unit net income or 1% increase in the business unit's customer satisfaction index. For example,increasing net income from $3 million to $3.3 million(or10% from its initial value) leads to a bonus of 10% of salary,while increasing the business unit's customer satisfaction index from 70 to 73.5(or 5% from its initial value) leads to a bonus of 5% of salary There is no bonus penalty when net income or customer satisfaction declinesIn 2013 and 2014, Mercantile Bank's three business units reported the following performance results

Retail Banking Business Banking Credit Cards

2013 2014 2013 2014 2013 2014

Net income $3600.000 $3912.000 $3,8000003,940000 $3,550,000 $3499,000

Customer satisfaction 73 75.48 68 75.9 67 78.88

Required 1Compute the bonus as a percent ofsalary earned by each business unit executive in 2014.

2Whatfactors might explain the differences between improvement rates for net income and those foi

customer satisfaction in the three units? Are increases in customer satisfaction likely to result in in- creased netincome right away?

3. Mercantile Bank's board of directors is concerned that the 2014 bonus awards may not actualh

reflect the executives overalll performance.in darticular the bank is concerned that executives car earn large bonuses by doing well on one performance dimension but underperforming on the other What changes can it make to the bonus plan to prevent this from happening in the future? Explain briefly.