How do you do part 2 of this case study?

Part 2 (40%) New Soviet Incentive Scheme - Information Elicitation Model

[When you work for a company after you graduate, if you present the idea to your boss/company, you will be commended /compensated / promoted]

This idea was used by now defunct socialist country of Soviet Union (now Russia) and it became a good subject of managerial accounting.

Tom is a salesman in the defense industry. He sells very expensive high-tech equipment. The defense industry market is very complex. Therefore, questions like "how many units of sales are considered as a success?" are very hard to answer for people other than salespeople in this area. As an experienced salesman, Tom knows the market very well. His boss, who had a financial job until a year ago, knows little about it.

Tom is evaluated based on actual sales compared to the goal. The company has allowed Tom to have upper hand and let him set the goal. Tom thinks he can sell 100 units. But he wants to appear hard-working. So he tells the boss that he can sell 90 units, and 90 becomes the goal. Then, he will actually sell 100 units, and the boss will be impressed, thinking that Tom really worked hard and over-achieved the goal.

The company has hired Gorky, a compensation/management specialist. He proposed the following compensation scheme.

Tom's Compensation = j G + k (A - G), if A G (achieving or exceeding goal)

= j G - m (G - A), if A < G (under-achieving goal)

where, A = Actual sales units by Tom, G = Goal (in sales units) set by Tom

Gorky said that under this scheme, the two conditions below are satisfied.

1. Tom will never lie when setting the goal. (For example, if Tom knows he can sell 100, he will set the goal at 100. He will not set the goal at 90 and actually achieve 100). He will honestly set the goal. The goal reveals his private knowledge. Why does he honestly set the goal? Because by doing so, Tom will get the better compensation.

1. After setting the goal, things could change. Whatever goal Tom set, it was in the past (sunk if we use the term studied in Ch. 3). So, after the goal is set, Tom will try hard to sell as many as possible, regardless of the goal. (For example, let's say the goal was 100, he will get more pay if he sell 110 rather than 100; selling 120 is better than 110; selling 90 is better than 80, etc.)

For the compensation scheme to work in the way as Gorky described, we need to correctly determine the values of j, k, and m in the above model.

Required:

A. Find ANY set of values of j, k, and m. Make sure that the set of numbers ALWAYS satisfies Conditions (i) and (ii) above.

B. Explain why (economic reasons) the numbers are chosen the way you choose.