Question: The Peterson division of MACO sells car batteries MACO s corporate

The Peterson division of MACO sells car batteries. MACO’s corporate management gives Peterson management considerable operating and investment autonomy in running the division. MACO is considering how it should compensate Ben Starks, the general manager of the Peterson division. Proposal 1 calls for paying Starks a fixed salary. Proposal 2 calls for paying Starks no salary and compensating him only on the basis of the division’s ROI, calculated based on operating income before any bonus payments. Proposal 3 calls for paying Starks some salary and some bonus based on ROI. Assume that Starks does not like bearing risk.

1. Evaluate the three proposals, specifying the advantages and disadvantages of each.
2. Suppose that MACO competes against Crown Industries in the car battery business. Crown is approximately the same size as the Peterson division and operates in a business environment that is similar to Peterson’s. The top management of MACO is considering evaluating Starks on the basis of Peterson’s ROI minus Crown’s ROI. Starks complains that this approach is unfair because the performance of another company, over which he has no control, is included in his performance- evaluation measure. Is Starks’s complaint valid? Why or why not?
3. Now suppose that Starks has no authority for making capital- investment decisions. Corporate manage-ment makes these decisions. Is ROI a good performance measure to use to evaluate Starks? Is ROI a good measure to evaluate the economic viability of the Peterson division? Explain.
4. Peterson’s salespeople are responsible for selling and providing customer service and support. Sales are easy to measure. Although customer service is important to Peterson in the long run, it has not yet implemented customer- service measures. Starks wants to compensate his sales force only on the basis of sales commissions paid for each unit of product sold. He cites two advantages to this plan:
(a) It creates strong incentives for the sales force to work hard and
(b) The company pays salespeople only when the company itself is earning revenues. Do you like his plan? Why or why not?

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  • CreatedJanuary 15, 2015
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