Harwood Medical Instruments PLC Horwood Medical instruments PLC (HM), based just outside of Bimingham, England. manufactured specialty meaical instruments and sold them in market riches that were becoming increasingly competitive and price sensitive becouse of pressures to reduce health care costs. HMII was organized into nine divisions eoch run by a general manager. Over the years. HMI had grown both orgaricaly and by acquisition. Six of the divisions had been acquired by HIM within the past decade. All of HMi's divisions sold medical products to hospit als, labcratories. and/or doctors, so the need for product quality and reliablity was high. The divisions varied significantly. however, in terms of the degree to which ther success depended on, for example, development of new products, efficiency of production, and/or customer service. Bonuses for division general managers were paid semL-annually. Up to the year 2009. these bonuses were calculated os 1% of division operating profits. HMI's managing director, Andy Guthrie, had concerns though that the operating profit 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, Wr. Guthrie explained to his chief financial officer that he was wiling to pay out higher bonuses than had been paid historically if improved performance waranted doing so. The new plan provided a base bonus for division general managers of 1% of division operating profits for the half-year period. This base bonus wos acfusted as follows: - Increased by 25,000 if over 99% of deliveries were on fime: by 2.000 if 9599% of deliveries were on fime; or by zero is less than 95% of deliveries were on time. - Increased by 25,000 if sales returns were less than or equal to 18 of sales, or decreased by 50% of the excess of sales retums over 18 of sales. - Increosed by 1,000 for every patent application fled with the UK Inteliectual Property Office. - Reduced by the excess of scrap and rework costs over 15 of operating profit. - Reduced by 5,000 if averoge customer satisfoction ratings were below 905 . If the bonus calculation resulted in a negative amount for a particular period, the manoger received no bonus. Negatlve amounts were not carried forward to the next period. Exhibit I shows results for two representative HMI divisions for the year 2010 , the first 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 (Uitrasound), which was acquired in 2007, sold and serviced ultrasound probes, transducers, and diagnostic imaging systems. The Ultrasound market promised excellent growth and profits 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 eamed 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 Uttrosound Diognostic Equipment Divisions, 2010 (\& in 000s) Assignment Questions 1. What are the advantages and disadvantages of the performance measurement system to award bonuses up to the year 2009 ? 2. Calculate the bonus earned by each manager of the two Divisions for each 6 month period and for the year 2010 (Take note that the figures in pounds (i) are presented in thousands). What conclusion can be drawn with the implementation of the new plan to award the bonus in 2010 when comparing the bonus awarded in 2009 ? 3. Apart from the new plan that was introduced, design an appropriate balanced scorecard that reflects the performance of Harwood Medical Instruments PLC and would encapsulate a rather "more balanced" approach in awarding of bonuses