Question 3 Kensington Enterprises Kensington Enterprises is a multinational diversied resource company with operations in more than 20 countries around the world. Kensington is considered the world leader in the supply of natural resources and related products and services. Kensington's strategy is to grow through innovation. Central to its strategy is realising the full potential of its employees and investment in new exploration and development projects. The main products of Kensington are petroleum, aluminium, carbon bre, coal and stainless steel. Each main product forms a separate product division within Kensington. Each division is designated as a prot centre under the responsibility of a divisional manager. The divisions operate relatively independently, however, there are numerous exploration projects that require the joint efforts of multiple divisions. The CEO of Kensington, Mr Bruce Green, is a strong believer in the power of performance measures and incentives to guide management action. As such, the setting of performance goals and the linking of pay to performance is rmly embedded within the corporate culture at Kensington. Each divisional manager participates in Kensington's incentive program. Incentives, in the form of cash bonuses, comprise about 30% of divisional managers' total compensation. Each year performance measures are established for each divisional manager that relate to sales growth, prot, gross margin, and customer satisfaction ratings. Divisional managers are provided with performance reports each month tracking progress on these performance goals. The cash bonus is aligned with these measures and is determined through the use of formulas. Despite impressive results in the past few years, the latest management reports indicate a downturn in protability for Kensington. CEO Bruce Green is concerned that the performance measurement and incentive system is no longer providing divisional managers with the appropriate incentives. He is considering replacing the existing scheme with a new scheme under which incentives are attached to purely subjective measures of managers' performance and are then also subjectively allocated to divisional managers on the basis of this evaluation. However, Green is concerned about how the managers will react to this alternative. Required : Evaluate the incentive compensation scheme currently in use at Kensington Enterprises. You should ensure that you evaluate characteristics of both incentives and the underlying performance measures to which they are attached. 6|Pagc