Company Background

Happy Airlines was founded in March 2002 and is one of a growing number of low-cost airlines

in the country of M. The company has won several awards such as The Most Trusted Airline

Brand for three consecutive years 2017-2019 and The Best Employer Award 2018. Besides,

Happy Airlines is also ranked as No.1 on-time performance and is Asia's greenest cleanest airline

group with the aim to have the lowest carbon dioxide (CO2) emissions among airlines in M

country.

Happy Airlines strategy is to operate as low-cost, high efficiency and green airline. In order to

do so the airline introduce reasonably flight price with young fleet, high punctual departure rates

and continuously invest in fuel-efficient new aircraft and improved engine technology. Happy

Airline has five separate divisions: Airline, Customer Services and Marketing, Engineering and

Maintenance, Human Resources, and Accounting and Finance.

Company Vision, Mission and Strategic Objectives

Vision: To be the leading low-cost airlines in our region with our innovative and rational

approach.

Mission: To provide our customers with safe, good value, point-to-point services. To achieve

this we will develop our people and operate for the benefit of passengers, people and

stakeholders.

Strategic objectives:

To maintain aircraft with the highest degree of airworthiness, reliability, and present ability in

the most cost-effective manner.

To conduct and maintain safe, reliable, and cost-effective flight operations.

To achieve On-Time Performance on all flights operated.

To provide safe, on-time, quality, and cost effective inflight service for total passenger

satisfaction.

To maximize revenue generation in passenger and cargo sales through increased yield by

diversifying market segments and efficient management of seat inventory and cargo space.

To operate efficiently and minimize the negative impacts on the environment.

Company Performance Measurement Practice

Happy Airlines follows the best practices in the industry with adoption of the balanced scorecard

since 2010. The Chief Executive Officer (CEO) of Happy Airlines believed that the balanced

scorecard helps the company to align its activities to the vision, mission and strategy and translate

strategy into action. However, some employees are not satisfied with the balanced scorecard

because they view that the technique cause extra burden to them as they need to achieve a stretch

target.

When Happy Airlines starts using the balanced scorecard, the company's philosophy was to have

stretch performance targets based on the belief that aggressive targets would push managers to

strive to do their best. In reality, these targets were "not unreachable, just tough target". The

intended profitability of achievement was 70% to 80%.

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The performance targets directly affected bonuses paid to those included in the bonus plan. Each

person included in the plan was assigned a bonus potential which, for most division managers,

was 30% of base salary. The bonuses paid were based half on profit before taxes (PBT) and half

on a subjective rating of performance (which was also influenced by profit performance). The

objective portion of the award was paid according to the following table:

Table 1: Objective Bonus Allocation

Actual division PBT (%

target)

<60

60

100

140

Bonus paid (% bonus

potential)

0

80

100

150

The subjective portion of the evaluation was based primarily on top management's judgement

of the degree of accomplishment of the targets in all four performance perspectives under the

balanced scorecard. For each perspective, the company require each divisions to identify four

performance objectives. This means that altogether there are sixteen performance objectives to

be monitored. In the current practice, if a division manager met the standards for twelve out of

sixteen performance objectives, top management would have to judge the importance of the

targets that were not met. If the four targets that were not met were judged to be critical, the

manager might earn no subjective bonus.

Bonuses were paid based on annual performance, but payments were made quarterly. The interim

(quarterly) payments were made only at 80% of the earned rate to protect the company from

paying bonuses that might not eventually be earned.

Gradually the corporate managers became dissatisfied with the stretch performance target

concept. Most importantly, they felt that has caused the corporation not to achieve its plans. Each

year some divisions achieved their targets, and some did not, but the company was consistently

missing its targets. Chief Financial Officer (CFO) explained:

"Since everybody knew that the stretch targets were too optimistic, it became, "OK to miss

target." For example, from the time when I joined Happy Airline in September 2008 until March

2010 I had to prepare eight performance reviews because the company was not achieving its

plans. The problem was that at 60% of budget, the managers were still in bonus territory, so they

did not have to worry much about meeting target. Their targets were like a wish. They were too

easily blown off."

There was also dissatisfaction with the bonus plan associated with the stretch targets. The

division managers, in particular, considered it to be too subjective and complex to communicate

to their middle managers. Communication on details of the plan was also hampered at two

divisions because the division managers did not want to disclose division-level financial

information to their personnel because they feared that the information might be leaked to

competitors. As a consequence, most of the division personnel included in the plan never knew

their bonus potential nor the bases on which the bonus awards were made.

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Most managers were also dissatisfied with the plan because the awards were typically not made

until three to four months, after the end of the quarter. The delay was caused by the several levels

of approvals that were necessary before the payments could be made.

After almost 10 years of the balanced scorecard implementation, the financial performance of

the company is not convincing and many targets were unable to achieve. Even though the

company gives bonus to managers, but, it fails to deliver the desired outcome as required by top

management. The Board of Directors (BOD) wonder why this situation happened and asks top

management to explain.

Current Business Situation

Following the Covid-19 outbreak, Happy Airlines experienced significant amount of revenue

losses in the early quarter of 2020. Almost 90% of the flight are suspended, however the

company vows to return the money to its passenger, but it will takes time. The company needs

to exercise a prudent financial management and revise its strategy to maintain its financial

sustainability. The company requests 40% of its workforce to take unpaid leave.

REQUIRED:

(a) Explain why do you think the balanced scorecard is the best approach to manage

performance at Happy Airlines.

(b) Identify FOUR (4) perspectives of the balanced scorecard which are suitable for Happy

Airlines. Explain your answers.

(c) Based on your answer in (b), identify TWO (2) objectives and TWO (2) performance

measures for each perspectives.

(d) Based on your answer in (c), develop a strategy map.

(e) Analyze why the stretch target approach is unable to help Happy Airlines to achieve its

target.

(f)do a memorandum to the board of director in order to explain FOUR (4) possible

reasons why pay-for-performance bonus is not work effectively for Happy Airlines.

(g) Recommend TWO (2) ways on how to improve rewards system in Happy Airlines.

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(h) Recommend TWO (2) actions that Happy Airlines should take to improve its financial

performance.