Solis Ltd (Solis) manufactures and installs renewable energy systems. It has four divisions in Australia: Wind, Thermal Solar, PV and Installation. The company was listed on the Australian Stock Exchange in 2015.

The CEO, Katrina Smith, believes that divisional managers should be given a high degree of autonomy and held accountable for the performance of their divisions. She believes that if the divisions prosper then the company and its shareholders will prosper.

Before the beginning of each financial year, Katrina reviews performance and then sets a return-on-investment (ROI) target for each division for the coming year, where ROI is defined as operating profit as a percentage of assets employed. Targets are set in consultation with the respective divisional manager with due regard to the prevailing market conditions. Katrina makes sure that the ROI target is challenging but achievable. Over the past 10 years, the ROI targets have tended to increase slightly each year.

For the past 7 years, Solis has been using a bonus and incentive scheme to motivate and reward key personnel. The scheme is based on the distribution of a bonus pool. The size of the bonus pool is 10% of Soliss residual income for the year and is capped at $1.6 million per year. The bonus pool is distributed to divisions on the basis of the ROI achieved by each division. If a division does not reach its target, then it does not receive a bonus. If a division achieves its target, then it receives a bonus score equal to the divisions actual ROI less the divisions target ROI, up to a maximum of 5.00 points. The bonus pool is then distributed according to each divisions score relative to the total bonus score. The bonus awarded to a division is then distributed to key personnel within the division as determined by the divisional manager.

Katrina is disappointed that Chloe Lee, the manager of the PV Division, has not taken the opportunity to increase her divisions production capacity. Katrina recalls that divisional managers have been reluctant to submit investment proposals on several occasions in the past.

Katrina has also found herself starting to think more about the suitability of the bonus system and underlying performance measures. A member of Katrinas business network, Leo Vas, has suggested that Solis would benefit a lot from the adoption of a balanced scorecard, both to measure performance and as the foundation of the bonus system. Katrina gets nervous when people start talking about non-financial measures and the like; she thinks the current focus on a small number of key financial measures has worked well to date, and seem to align with shareholder interests

1. For the year ended 30 June 2020, Soliss residual income was $13,939,000. The target and actual ROIs for each division are given in the Table below. Calculate the bonus awarded to each division by completing the Table provided [in the supplementary documents file]. Note: you are required to complete the shaded areas. Be sure to upload the table into the response space; re-create the table; or alternatively, clearly indicate the bonus scores and bonus award for each division in the answer space provided. 4 marks

   Division	Target ROI	Actual ROI	Bonus Score	Bonus Awarded ($000) (to the nearest thousand dollar)
   Wind Division	11.3%	12.5%	1.2
   Thermal Solar Division	9.5%	10.0%	0.5
   PV Division	12.8%	14.0%
   Installations Division	12.0%	11.5%
   Bonus pool: $

2. State TWO key strengths of the existing bonus plan. Briefly explain. 6 marks

3. Identify and explain one weakness (other than the use of non-financial measures) of the bonus pool scheme. The weakness must be evident in the Solis narrative provided in the question.

   Suggest a change that would improve the scheme by alleviating that weakness. 3 + 3 = 6 marks

A wind generator A thermal solar collector. A PV Module A partially completed PV Installation A wind generator A thermal solar collector. A PV Module A partially completed PV Installation