Nataraji Company Nataraji Company is a highly diversified company which grants its division executives a significant amount of authority in operating the divisions. Each division is responsible for its own sales, pricing, production, and cost of operations and the management of accounts receivables, inventories, accounts payables and use of existing facilities. Cash is managed by Corporate headquarters, all cash in excess of normal operating needs of the divisions is transferred periodically to corporate headquarters for redistributions or investment. The division executives are responsible for presenting requests to corporate management for investment projects. The proposals are analyzed and documented at corporate headquarters. The final decision to commit funds to acquire equipment, to expand existing facilities, or for other investment projects is necessitated by Natarajis Capital allocation policy. The corporation evaluates the performance of division executives by the return on investment (ROI) measures. The asset base is comprised of fixed assets employed plus working capital exclusive of cash. 10 | P a g e Compiled by Dr Seif R. Muba: PhD in Economics-HULL, UK; Msc BA (Fin, Bank and Insr); VU-Amsterdam, The Netherlands; BAF-TZ The ROI performance of division executive is the most important appraisal factor for salary changes. In addition, the annual performance bonus is based on the ROI results, with increase in ROI having a significant impact on the amount of the bonus. The Nataraji Corporation adopted the ROI performance measure and related compensation procedures about 10 years ago. The company did so to increase the awareness of divisional management of the importance of the profit asset relationship and to provide additional incentive to the division executives to seek investment opportunities. The company seems to have benefited from the program. The ROI for the corporation as a whole increased during the first years of the program. Although the ROI has continued to grow in each division, the corporate ROI has declined in recent years. The corporation has accumulated a sizeable amount of cash and short term marketable securities in the past 3 years. The corporate management is concerned about the increase in the short-term marketable securities. A recent article in a financial publications suggested that the use of ROI was over emphasized by some companies, with results similar to those experienced by Nataraji. Requirements: 1. Describe the specific actions divisions managers might have taken to cause the ROI to grow in each division but decline for the company. Illustrate your explanation with appropriate examples. 2. Explain using the concepts of goal congruence and motivation of division executives, how Natarajis over emphasis on the use of the ROI measure might result in the recent decline in the companys return on investment and the increase in cash and short-term marketable securities. 3. What changes could be made in Nataraji Companys Corporation policy to avoid this problem? Explain your answer.