Firms often use financial performance targets to determine bonus (ince

QUESTION

Firms often use financial performance targets to determine bonus (incentive) compensation for managers. If a firm used a targeted percentage increase in sales (for example, the goal might be to increase sales by 5%) or a targeted profit margin on sales (the goal might be to achieve a 10% profit marg
For the best results, companies need to gather and analyse the right data from their operations:revenues and costs by product line and profit or cost centre, production volumes, cost, capacity and utilization of equipment, overhead related to support functions. These data will provide a fairly complete cost pictur by product line. Companies must then quantify and model three key factors that drive cost. 1) Scale: the effect of volume on costs per unit. 2) Efficiency: Relative productivity, Utilization and process complexity. 3) Factor costs: INput costs, operating costs and logistics costs.A detailed analysis will reveal the most relevant cost drivers and the relative effect of each on different products. The total cost of the product must be weighted against the value delivered in terms of revenues and competetive differentiation. This will help the management to reach sales goals or the profit margin goals.The variable performane based bonus amounts to 30% of fixed salary for members of the Corporate Executive committee. and 40% for the CEO.The bonus amount is based on the degree to which the following targets are met first: the companys sales and EBIT targets and second individual qualitative and quantitative targetsThe

l targets (Sales and EBIT) are set annually by the Board of Directors in December for the following year.The financial targets accounts for 60 to 80% of the variable bous, and the personal target accounts for 20 to 40 percent.If less than 80 percent of the target is reached, the variable bonus is not paid.In order for any bonus that must be paid the company must meet an annual financial goal which is based on adjusted EBITDA and Earning per share. Assuming the EPS is achieved then1) the Company achieves the adjusted EBITDA target, then 50% of the exess is used to supplement the bonus pool to a maximum of 200%.2) if the company fails to meet the adjusted EBITDA then the bonus pool is reduced to the extent necessary to enable the company to meet its target.These are the grawbacks in linking the bonus to the financial targets.

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