Question

Mercantile Bank recently introduced a new bonus plan for its business unit executives. The company believes that current profitability and customer satisfaction levels are equally important to the bank’s long-term success. As a result, the new plan awards a bonus equal to 1% of salary for each 1% increase in business unit net income or 1% increase in the business unit’s customer satisfaction index. For example, increasing net income from $ 3 million to $ 3.3 million (or 10% from its initial value) leads to a bonus of 10% of salary, while increasing the business unit’s customer satisfaction index from 70 to 73.5 (or 5% from its initial value) leads to a bonus of 5% of salary. There is no bonus penalty when net income or customer satisfaction declines. In 2013 and 2014, Mercantile Bank’s three business units reported the following performance results:


Required
1. Compute the bonus as a percent of salary earned by each business unit executive in 2014.
2. What factors might explain the differences between improvement rates for net income and those for customer satisfaction in the three units? Are increases in customer satisfaction likely to result in increased net income right away?
3. Mercantile Bank’s board of directors is concerned that the 2014 bonus awards may not actually reflect the executives’ overall performance. In particular, the bank is concerned that executives can earn large bonuses by doing well on one performance dimension but underperforming on the other. What changes can it make to the bonus plan to prevent this from happening in the future? Explainbriefly.


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  • CreatedMay 14, 2014
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