Dash Buildings, Inc.

Ann Smith is the president of Dash Buildings, Inc. (DBI), a subsidiary of Dash, Inc., one of the new long-distance telephone companies that sprang up as a result of deregulation of long-distance telephone service in the United States. DBI is responsible for purchasing and managing real estate used by the various units of Dash. DBI acts like a private real estate investment firm - acquiring properties, managing those properties, and providing space to the other divisions of Dash. DBI occasionally rents space to other tenants when it acquires a building that has more space than is needed by Dash. DBI does not, however, purchase buildings for the express purpose of renting to non-Dash tenants. DBI is a corporation rather than a department only for reasons of legal convenience. DBI acts like any other department within Dash. DBI does not raise its own funds but receives them from the corporate treasury. When Smith first joined Dash as a property mananger, internal rate of return was the primary tool for project analysis. This often forced DBI to acquire smaller, older, less efficient buildings. Her role on a task force leading the conversion to net present value was the source of recognition that led to her eventual promotion to president of DBI. Net present value analysis had allowed DBI to acquire newer, larger, and more modern buildings. This has led to a dramatic decrease in complaints about buildings and greater overall employee satisfaction. Oversight of capital budgeting at Dash was the responsibility of the treasurer. The prior treasurer had allowed each operating unit to use its own capital investment analysis methods, with some choosing net present value, and some even choosing accounting rate of return. The new treasurer, who comes from a background in investment banking, wants to standardize analysis so proposals can be compared from one unit to the other. While the treasurer has not issued a formal policy, it is clear that he is leaning toward internal rate of return. DBI has formally evaluated as a profit center, being credited with revenue equal to the estimated cost of renting space of the same type in the local market. Smith and her employees receive bonuses based on the profit of DBI. Bonuses at DBI had been quite small in the early years, but rising rents along with some well-timed purchases at the bottom of a real estate depression made the division profitable enough to bring it up to the maximum allowable bonus. She is, therefore, able to concentrate on maximizing satisfaction, which she believes to be the source of any further career advancement. Smith is concerned that internal rate of return will force her to return to acquiring less desirable office space. Dissatisfaction and complaints about building quality could derail her career.

1) Comment on the company's methods for evaluating and rewarding success. Does the reward structure encourage optimal capital investments in DBI and the rest of the company? 2) Would you recommend that the reward structure be changed in any way?