Triton Electronics, Inc. produced a wide range of electronic equipment, including signal sources, test equipment, communications systems, and various piece parts and subassemblies such as motors, generators, and probes.Total annual sales were in excess of $8 billion.

The company's objective was to maximize shareholder value.In some of its business areas, innovation through research and development was crucial to stay ahead of the competition.In others, price competition made tight control over costs the key success factor.

The company was organized by product line.Its 16 relatively autonomous divisions were managed as profit centers.The division managers reported to one of four Business Group managers who, in turn, reported to the company's CEO. Each Business Group was organized around a strategic theme, and divisions within each Business Group used some shared resources.

The performance evaluation and incentive plan had the following features:

1. Bonuses would be determined by the performance of the entity for which each manager was responsible.That is, division manager bonuses would be based 100 percent on division performance; Business Group manager bonuses would be based 100 percent on Business Group performance; and corporate manager bonuses would be based 100 percent on corporate performance.
2. For bonus award purposes, actual performance would be compared with targets negotiated during the annual budgeting process.
3. Each division would be given an "economic value added" target equal to budgeted operating profit minus budgeted operating assets multiplied by 12 percent, which was estimated to be Triton's weighted average cost of capital.For example, a division with an operating profit budget of $100,000 and budgeted operating assets of $500,000 would be given an economic value added (EVA) target of $100,000 - $60,000 (=$500,000*12%) = $40,000.
4. If an entity's actual economic value added were exactly equal to its target, the manager would earn a bonus equal to 50 percent of salary.Above the target, the bonus could increase up to a maximum of 150 percent of salary, while below the target it would decrease to a minimum of zero.

Exhibit 1 Performance information for five of the sixteen divisions of Triton Electronics ($ in 000) Budgeted Actual Division Operating Operating Economic Operating Operating Economic Profit Assets Value Added Profit Assets Value Added $ 1,000 5 8,000 5 40 $ 1,150 $7,000 $ 310 1,000 8,000 40 4,500 7,000 3,660 50 1,000 (70) 300 800 204 (700) 4,000 (1,180) 300) 4,200 (804) 600 2,000 360 100 2,000 (140) Exhibit 2 Performance information on Division E (single-product division)| Per Unit Budget Actual Variance (budgeted Sales $ 50 $10,000,000 59,090,000 5910,000 U Cost of Goods Sold Raw Material 12 2,400,000 2, 100,000 $300,000 F Direct Labor 1,000,000 950,000 $50,000 F Fixed Overhead 3.000,000 3.030,000 $30,000 U Gross Margin 3,600,000 3,010,000 $590,000 U Selling, Gepil and Admin. 2,200,000 2,185,000 $15,000 F Research & Development 800,000 725,000 575,000 F Operating Income 5 600,000 $ 100,000 $500,000 U Contribution Per Unit $ 28 Units Sold by Division E 200,000 190,000 Total Market for Product (units) 4,000,000 3,455,000 Average Industry Selling Price $ 50.00 $ 46.00 Units of Raw Material Used in Manufacturing 200,000 185,833 U= Unfavorable Variance, F = Favorable Variance