Question 4:

The Batteries division of Dexter Cars sells car batteries. Dexter is considering how it should compensate Jeremy Clark, the general manager of the Batteries division.

Proposal 1 calls for paying Jeremy Clark a fixed salary.

Proposal 2 calls for paying Jeremy Clark no salary and compensating him only with a commission on the basis of the division's ROI, calculated based on operating income before any commission payment.

Proposal 3 calls for paying Jeremy Clark some salary and some bonus based on ROI.

Assume that Jeremy Clark does not like bearing risk.

Required:

Discuss the advantages and disadvantages of each proposal for Jeremy and the company and consider which proposal would be the most beneficial for Jeremy Clark and which for the company and why. Apart from discussing the return on investment as a measure of performance, you are expected to consider the agency theory and Herzberg's two-factor theory in your discussion.