GMV case Goldman, Mason and Vernon (GMV) The importance of the upcoming annual management meeting of Goldman, Mason and Vernon (GMV) was playing on the minds of the two most senior board members: Sharon Goldman (daughter of founder Bill Goldman) and Bruce Clayton. The business model of GMV had worked well for the last twenty years, but increasing uncertainty in financial and product markets combined with a worldwide reduction in activity had resulted in the Board considering a number of changes within the organisation to ensure its continued success. The most contentious of these changes, a new incentive compensation plan, was to be debated by senior managers at the next senior management meeting. ACCT30002 Enterprise Performance Management Sample Review Questions Page 6 The Company GMV operates as a listed private-equity company. It was established in 1991 by Bill Goldman as a company making rather small strategic acquisitions. Bill had seen the company grow to what it is today, the only listed private-equity firm in Australia and New Zealand. GMV looks to make strategic acquisitions of un-related companies, where there is significant potential to make operational improvements. Each of the acquired entities operate as a separate autonomous business unit of GMV, although there are a number of key elements common across each entity, such as the budgeting, planning and incentive systems used. At present, GMV has six key business units. Each of the business units is led by a business unit manager. Each business unit manager reports to the CEO who in turn reports to the Board. The business units are highly decentralised, with business unit managers responsible for a range of functions including product or service development, manufacturing (where applicable) and marketing strategies. Innovation and limited risk taking are encouraged within an environment of open-mindedness. These concepts are captured in GMVs fundamentai beliefs and values statement, which includes a description of beliefs relating to: decentralization; growth; communications; education; incentives and goals; and, innovation. Planning and control In line with its beliefs statement, GMV has relatively few corporate rules and allows each business unit to maintain its authority structure when acquired by GMV. However, GMV did implement its own planning and budgeting system. Three formal planning devices are used: 1. a rolling five-year strategic plan which is presented in October each year by the business unit managers. The main purpose of this is to force the managers to think strategically about their business units and serve as a basis of discussion with senior management. These discussions occur regularly during senior management visits to business unit sites and often focus on helping each business unit deal with emerging uncertainties within their markets. 2. an annual business plan which sets the benchmarks for performance on an annual basis in such areas as marketing and production strategy, staff planning, R&D and capital expenditures. This plan also provides details of expected operating profit increases. 3. monthly performance reports which focus on monthly and year-to-date performance against specified targets across a range of measures. The Incentive System Until recently, the reward system in place was relatively simple. All senior management (8 managers), business unit managers (6 managers) and the top 6 senior managers in each business unit (36 managers) shared in a common bonus pool. The bonus pool, was determined on the basis of: $100 000 + 10% of increases in combined divisional operating profits. The bonus pool was shared: 15% to senior management; 50% to business unit managers; and, 35% to managers within the business units. The bonus payment was in the form of cash. The proposal for a new incentive plan had been prepared by the chieffinancial officer, Sam Dementiava. Briefly, 53 m's proposal included: ACCT30002 Enterprise Performance Management Sample Review Questions Page 7 i. Senior managers being rewarded on the basis of organisational economic value-added (EVA). If annual targets (as set by a Board sub-committee) for EVA were met, then each of the senior managers would be eligible to receive a specified parcel of shares in the company. ii. Incentives for Business unit managers based on: - Corporate wide EVA (25%); - Business unit EVA (25%); and, - a mix of non-financial measures relevant to each individual business unit as agreed with the CEO (50%). Where targets were met, Business unit managers would receive their incentive in the form of company shares. iii. Incentives for senior managers within business units would be rewarded solely on the basis of business unit EVA. Incentives would be paid in cash. Sharon and Bruce knew the Board had some serious deliberations ahead. They were aware that incentive plans generally had attracted negative publicity lately. They were determined to have the Board make the right decisions with respect to GMVs incentive plan. 1. Evaluate the current incentive plan at GMV. Make sure you consider the type and mix of incentives as well as the underlying performance measures in your response. 2. Evaluate the proposed incentive plan at GMV. Make sure you consider the type and mix of incentives as well as the underlying performance measures in your response. Do you believe this plan should be introduced? Explain