Question
The CEO of a global consulting firm oversees three divisions: Americas, Asia, and EMEA (Europe, Middle East, and Africa). Her annual bonus is based on
The CEO of a global consulting firm oversees three divisions: Americas, Asia, and EMEA (Europe, Middle East, and Africa). Her annual bonus is based on a percentage of net profit. For each 1% increase over annual budgeted net income, she receives 5,000. In addition, the consulting firm is owned by a venture capital company that recently loaned the consulting company funds for growth. The amount they will charge in annual interest is based on the previous year's net income over budget. The % interest rate decreases for each % of net income attainment over budget.
For each division, there is a lead Managing Director. Managing Director bonuses are based on what is called a "step-up plan." For every 5% over net income budget, the Managing Director receives an equivalent of 8,000 in their local currency.
In December, the CEO was eager to find new business to increase net income as much as possible, not only for her own bonus, but also to lower the following year's interest rate on the loan, which would benefit company. At the end of November each division's net income results compared to budget was as follows:
Americas: 6% over budget
Asia: 9.9% over budget
EMEA: 5.3% over budget
In December, The CEO called each Managing Director asking for a big effort to increase December profit, including asking that consultants, if possible, put in overtime to increase the % of completion on consulting projects. The company uses % of completion as a basis for recording revenue and expense.
In December, Asia was successful in increasing annual net income to 11.8% over budget. However, Americas and EMEA were only able to increase December profit slightly, and ended the year at the same % of budget they were at the close of November. However, in January Americas and EMEA recorded record net income for the month.
What was the problem and what was the impact on the company
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