Discussion Case 6-1 Should We Implement an Earnings-Based Bonus Plan? Benjamin Vincent is the CFO of Annie...

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Discussion Case 6-1
Should We Implement an Earnings-Based Bonus Plan? BenjaminVincent is the CFO of Annie Company. The company’s CEO has askedBenjamin to design an incentive scheme that will motivate employeesto focus more on the company’s bottom-line results. Benjamin isconsidering a plan that will give each employee a bonus based onthe company’s reported net income for the year. Each employee willreceive an amount equal to the company’s earnings per sharemultiplied by either 10,000 times, 50,000 times, or 200,000 times,depending on the employee’s level in the company. Last year, AnnieCompany’s earnings per share was $1.32. Benjamin has asked you foryour advice. In particular, he wants you to explain thedisadvantages of having an earnings-based bonus system.
We Only Need Another $100,000!
Chris Titera is the CFO for Dallas Company. It is January 10,and Chris has just finished compiling the preliminary financialresults for the most recent fiscal year, which ended on December31. The preliminary results indicate that Dallas lost $100,000during the year. Dallas is a large company (with assets in excessof $1 billion), so the $100,000 loss is essentially the same aszero. However, the board of directors thinks that it conveys a verynegative image for Dallas Company to report a loss for the year,even if the loss amount is very small. As a result, it hasinstructed Chris to look at the numbers again and see if he canturn this loss into a profit. What things can Chris do, as the CFO,to turn this loss into a profit? What concerns should Chrishave?

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4.3 Ratings (716 Votes)

Disadvantages of Earning based Bonus System 1 Employee Motivation In general earning based bonus fails to drive the motivation of the employees who tend to be the liabilities dead weight rather than the assets in the team When each employee get the same incentive multiplier times the EPS the performers and nonperformers would be equally rewarded This overall will fail to bring up the low performers given the fact they are making the same as the high performers in their team See Answer

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Discussion Case 6-1Should We Implement an Earnings-Based Bonus Plan? BenjaminVincent is the CFO of Annie Company. The company’s CEO has askedBenjamin to design an incentive scheme that will motivate employeesto focus more on the company’s bottom-line results. Benjamin isconsidering a plan that will give each employee a bonus based onthe company’s reported net income for the year. Each employee willreceive an amount equal to the company’s earnings per sharemultiplied by either 10,000 times, 50,000 times, or 200,000 times,depending on the employee’s level in the company. Last year, AnnieCompany’s earnings per share was $1.32. Benjamin has asked you foryour advice. In particular, he wants you to explain thedisadvantages of having an earnings-based bonus system.We Only Need Another $100,000!Chris Titera is the CFO for Dallas Company. It is January 10,and Chris has just finished compiling the preliminary financialresults for the most recent fiscal year, which ended on December31. The preliminary results indicate that Dallas lost $100,000during the year. Dallas is a large company (with assets in excessof $1 billion), so the $100,000 loss is essentially the same aszero. However, the board of directors thinks that it conveys a verynegative image for Dallas Company to report a loss for the year,even if the loss amount is very small. As a result, it hasinstructed Chris to look at the numbers again and see if he canturn this loss into a profit. What things can Chris do, as the CFO,to turn this loss into a profit? What concerns should Chrishave?