The Drexel division of NESCO sells pet food. NESCOs corporate management gives its division managers considerable operating and investment autonomy in running their divisions. NESCO is deciding how it will compensate Tim Thomas, the general manager of the Drexel division. NESCO is considering the following three proposals:

Proposal 1 o Pay Thomas a fixed salary.

Proposal 2 o Pay Thomas no salary. His compensation would be paid solely on the basis of the divisions ROI, calculated as operating income before any bonus payments divided by the divisions investment.

Proposal 3 o Pay Thomas some salary and some bonus based on ROI.

QUESTIONS:

1. Evaluate the three proposals, comparing the advantages and disadvantages of each.

2. Assume Thomas does not like bearing risk. Which of the three proposals will he prefer? Explain your answer in detail.

3. Assume NESCOs goal is to align Thomass objectives with its own objectives. Which of the three proposals will NESCO prefer? Explain your answer in detail.

4. Suppose NESCO competes against DOGCO, a company of similar size in the same business environment. NESCO management is considering evaluating Thomas on the basis of Drexels ROI minus DOGCOs ROI. Thomas complains that this method is unfair because the performance of another company, over which he has no control, is included in his performance evaluation measure. Is Thomass complaint valid? Explain in detail why or why not.

5. Drexels salespersons are responsible for selling and providing customer service and support. Sales are easy to measure. Although customer service is important to Drexel in the long run, it has not yet implemented customer service measures. Thomas wants to compensate his sales force only on the basis of sales commissions paid for each unit of product sold. He cites two advantages to the plan: (1) it creates strong incentives for the sales force to work hard, and (2) the company pays salespersons only when the company is earning revenues. Provide at least two reasons that Thomass proposal is not a good plan. Explain your answer in detail.