Case Study Harwood Medical Instruments PLC Harwood Medical Instruments PLC (HMI), based just outside of Birmingham, England, manufactured specialty medical instruments and sold them in market niches that were becoming increasingly competitive and price sensitive because of pressures to reduce health care costs. HMI was organized into nine decisions each run by a general manager. Over the years, HMI had grown both organically and by acquisition. Six of the divisions had been acquired by HMI within the past decade. All of HMI's divisions sold medical products to hospitals, laboratories, and/or doctors, so the need for product quality and reliability was high. The divisions varied signicantly, however, in terms of the degree to which their success depended on, for example, development of new products, efciency of production, and/or customer service. Bonuses for division general managers were paid semi- annually. Up to the year 2009, these bonuses were calculated as l% of division operating prots. HMI's managing director, Andy Guthrie, had concerns though that the operating prot measure was too narrowly focused. He had been reading articles about performance measurement and decided to a \"more balanced\" scorecard. In November 2009, just before introducing a new bonus plan, Mr. Guthrie explained to his chief nancial ofcer that he was willing to pay out higher bonuses than had been paid historically if improved performance warranted doing so. The new plan provided a base bonus for division general managers of 1% of division operating prots for the halfyear period. This base bonus was adjusted as follows: ' Increased by 5,000 if over 99% of deliveries were on time; by 2,000 if 95-99% of deliveries were on time; or by zero is less than 95% of deliveries were on time. ' Increased by 5,000 if sales returns were less than or equal tol% of sales, or decreased by 50% of the excess of sales returns over 1% of sales. ' Increased by 1,000 for every patent application led with the UK Intellectual Property Ofce. ' Reduced by the excess of scrap and rework costs over 1% of operating prot. . Reduced by 5,000 if average customer satisfaction ratings were below 90%. If the bonus calculation resulted in a negative amount for a particular period, the manager received no bonus. Negative amounts were not carried forward to the next period. Exhibit 1 shows results for two representative HMI divisions for the year 2010, the rst year under the new bonus plan. The Surgical Instruments Division (SID), one of HMI's original businesses, sold a variety of surgical instruments, including scissors, scapels, retractors, and clamps. The markets for these products were mature, so growth was relatively slow. Not much innovation was needed, but controlling costs was critical. The Ultrasound Diagnostic Equipment Division (Ultrasound), which was acquired in 2007, sold and serviced ultrasound probes, transducers, and diagnostic imaging systems. The ultrasound market promised excellent growth and prots if the division could keep its sophisticated products on the cutting edge technologically and control both product development and product costs effectively. In 2009, the total annual bonuses for the year earned by the managers of SID and Ultrasound were approximately 85,000 and 74,000, respectively. Exhibit 1 Harwood Medical Instruments PLC Operating results for the surgical Instruments and Ultrasound Dia_nostic Eui ment Divisions, 2010 i in 0005 Ultrasound Diagnostic Equipment Division z sze.mo 4 Sales rem 456 420 m _ __ Customer satisfaction (avers e) Assignment Questions 1. Critically analyze the current reward system that Harwood Medical Instruments PLC uses to award the bonus. 2. Calculate the bonus earned by each manager of the two Divisions for each 6-month period and for the year 2010 ji.e. total bonus! [Note: the gures are in thousands; ('0005)]. 3. (i) Design a performance measurement reward system that would encapsulate a rather \"more balanced\" approach in awarding of bonuses. (ii) Briey explain how the reward system you design in 3(i) can be used to award bonus