978-0137024971 Chapter 9 Part 3

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of information that should be generated from the system from those employees

who work with a MACS on a routine basis (and in some cases even for those

who only use the system on a limited basis) has several effects. First, the

system is updated with information that comes from employees who are closest

to their jobs and hence know what information they need. Second, through

participation employees will feel that they are having a direct effect on their

work environment and this could increase their motivation and morale. Third,

the organization as a whole benefits because it is able to obtain the most up–to–

In order for a MACS to function well, employees must be constantly re–

educated as the system and its performance measures change. If employees

9-77 (a) This form of budgeting is called consultative.

(b) The pros of consultative budgeting are that the organization can gather

information from subordinate managers about their local operations. Local

managers have more insight and experience than those far from the

On the con side, the superior has the final say on the level at which the

budget is set. In some situations, the final budget may be far from where the

subordinate manager thought it should be. In this case, employees morale

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9-78 In participative budgeting, budgets are set jointly between superior and

subordinate managers. This means that both parties negotiate the budget and

once both parties leave the negotiating table, what has been decided will stand.

Participative budgeting has many advantages, such as allowing superiors to

Setting budgets authoritatively is very efficient. Senior management can

simply determine by fiat what each subordinate manager’s budget will be. This

may be the most appropriate method if subordinate managers are not very

knowledgeable about the budgetary process or if the organization is simply

trying to save time and the resources involved with the other two types of

When budgets are set via consultation, the organization is attempting to gather

information from subordinate managers about their local operations. The idea

is that local managers have more insight and experience than those not close to

the operation. The organization is also hoping that allowing subordinates input

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9-79 (a) The motivation of the sales group is to understate their sales estimates in

(b) The organization’s budgets will understate sales. If capacity is planned

(c) The need is to develop a scheme that eliminates the motivation of the sales

force to understate their sales expectations. The idea would be to decouple

the sales estimates and the sales targets. One approach would be to

9-80 Woody is engaging in the process of building slack into his budget. Many

believe that this is a “rational” thing for Woody to do to protect himself from

any kinds of uncertainties in the environment that he might face. For example,

if his key source of raw materials dries up and Woody has to find an alternative

One way for the organization to reduce slack building is to modify the way that

it evaluates Woody and his fellow manager’s performance. If, in the past, harsh

penalties have been levied on those who did not achieve their budgets, then

slack building behavior will be encouraged. Instead, the organization may

determine performance schemes that reduce the pressure to meet the budget, by

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9-81 Tying pay to performance has taken hold of U.S. business. Some believe that

paying a good, fair salary should be motivating enough, and that using pay-for-

performance sends the wrong signal to employees. That is, such incentive

A possible disadvantage of tying pay to performance is that employees may

focus only on the item(s) used to determine the bonus, leading to dysfunctional

9-82

Organization

Unit

What Behavior Should

Be Rewarded?

What Is an Appropriate

Incentive System?

Symphony orchestra

Number of tickets sold,

Group–oriented performance

Market wage plus profit–share

Government welfare

office

Number of cases processed,

Success in helping clients

Market wage plus

performance-related bonus

Airline

complaint desk

Customer

satisfaction

Market wage plus

performance-related bonus

Control room in a

nuclear-generating

facility

Operating equipment

as required

Market wage

Basketball

team

Individual performance

for some players plus

team success

Wage plus performance-

related bonus

9-83 This is a practical question designed to put the student in a situation of

managing a business where employees cannot be supervised directly and have a

strong impact on repeat sales. The dilemma is that the jobs are relatively low

Most responses will suggest some type of profit sharing system where the

employees are paid a market wage to attract them to the organization and then a

profit share to motivate them to do their work conscientiously and to develop

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The company might consider moving to a charge that is based on work done

rather than time worked. This would provide the opportunity of shielding the

customer from unfavorable labor efficiency variances and allow the use of a

gain sharing type of plan that pays workers bonuses based on their ability to

9-84 (a) This is a deep issue that plagues all research and development activities

in profit seeking organizations. The question is how to draw the line

between letting people do research that is so basic that it may never

result in profitable patents but, if it does, may represent a profound

There does appear to be a problem at the moment. If we define research

and development productivity as the rate of new product introduction

(b) The focus will be on identifying market opportunities and directing the

attention of the research staff toward meeting these opportunities. A

share of the income provided by a new product could be paid to people

who develop that product. The compensation plan needs to be changed.

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9-85 (a) Some obvious positive points: this plan is very specific, it focuses on

(b) Some obvious concerns: profit performance is a short-run performance

measure and there is no discussion of how the pool proceeds are

distributed to individual employees. Like all group incentives, this plan

suffers from the problem of people who do not do a good job pulling







320332

(d) Tightening standards every period reduces the motivational effects of

this system. This is because process improvements provide benefits for

9-86 (a) Profit sharing pool 

lower of [45,000,000 – (100,000,000 × 18%)] × 40% or 7,000,000 =

(b) Marg Watson’s bonus

000,000,25

000,68

000,000,7 

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(c) This profit sharing plan is specific and has justifiable economic

(d) The plan pays nothing unless a certain level is achieved. This may be

unfair when times are bad. That is, with severely depressed economic

conditions, the employees may do a good job and earn no bonuses. It is

The choice of 18% should reflect the return available to shareholders for

Basing the profit share on salary rather than performance assumes that

the employee’s contribution is proportional to salary. While this makes

The upper limit of $7,000,000 is desirable from the perspective of the

The 40% profit share seems a bit low. Some plans are as high as 50%. It

9-87 (a) Target hours

= (0.2  200,000) + (0.15  220,000) + (0.25  130,000) +

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(b) It is clear and it is based on something that the employees can control

(c) It is not clear whether this amount is substantial enough to have any

9-88 (a) The Scanlon plan base ratio would be determined as follows

Base ratio payroll costs

value of production

  

3000 000

50 000 000 006

, ,

, , .

The quarterly amounts accumulated in the plan are shown in the

following table.

Quarter

Ratio

Plan Change

Cumulative

1

2475 000

45 000 000 0055

, ,

, , .

45,000,000 × (0.060 – 0.055) = $225,000

$225,000

2

3480 000

60 000 000 0058

, ,

, , .

60,000,000 × (0.060 – 0.058) = $120,000

$345,000

3

3575 000

55 000 000 0065

, ,

, , .



55,000,000 × (0.060 – 0.065) =

($275,000)

$70,000

4

2832 000

48 000 000 0059

, ,

, , .

48,000,000 × (0.060 – 0.059) = $48,000

$118,000

Therefore the amount available to be distributed to the employees at the

(b) The Scanlon plan assumes that the payroll costs are highly variable. This

was likely true in the 1930s when the plan was originally proposed.

However, in today’s conditions many labor costs are essentially fixed

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(c) The Scanlon plan assumes employee participation and group effort.

Therefore, a reasonable proposal is to divide the distribution equally

(d) Under this approach, the base ratio for the following year would be

0.055, the ratio experienced in quarter 1. This is called the ratchet effect.

Its result is to quickly tax away any innovations that the employees

9-89 (a) Speeding up production was supposed to increase productivity and lower

(b) Middle managers sacrificed quality for conformance to the directive to

(c) The result was that the quality of the motorcycles declined and customers

(d) The system was modified by instructing the employees that the

organization was committed to quality and that no motorcycle was to be

shipped with any known defect. Front-line employees were given the

9-90 Denver Jack’s approach does not allow for participation on the part of

employees. Thus, he is losing many good ideas and probably stifling the

motivation of his employees. Further, Denver Jack is not getting the employee

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9-91 This incentive compensation plan seems to meet the most important

The plan is precise in terms of what it rewards on the two elements of

performance—shorter-term performance measures that are subject to cash

The stock price component of the plan has a time frame that is long enough to

promote a longer-term decision-making perspective, but short enough to

A key characteristic of the plan is that it relies heavily on decisions made by

9-92 (a) This change is inconsistent with the idea that compensation should have

(b) The employees would likely complain about the risk imposed on them by

(c) Given the approach of all compensation being commission based taken,

an argument can be made that it is reasonable to set the commission so

that the wage bill would have been the same under the previous and new