(Suboptimization) Compensation consultant, Craig Schneier, describes an expe¬ rience by one of his clients who decided to pay the purchasing department em¬ ployees bonuses if they kept the cost of purchases down:

“The problem was, to make that happen they were relying on second-tier sources and accepting poor-quality materials. The company was in the middle of a very big order, and the fasteners were lousy and ended up costing millions of dollars, while the [purchasing] department walked away with big bonuses.”

Communication Activities

[SOURCE: Adapted from Amanda Bennett, “Paying Workers to Meet Goals Spreads, But Gauging Performance Proves Tough,” Wall Street Journal (September 10, 1991), pp. Bl, B4. Reprinted by permission of The Wall Street Journal, © 1991 Dow Jones & Company, Inc. All Rights Reserved Worldwide.]

a. Using the plan-performance-reward model in Exhibit 22-1, identify where the company described above went awry in structuring the performance- based pay plan.

b. How can the company use the feedback received regarding the purchasing department’s performance to improve the design of the pay plan?

c. How could the purchasing department’s behavior be changed by combining the purchasing department with the production department for group-level performance evaluation purposes?