Executive compensation, balanced scorecard. Community 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 net income or 1% increase in the company’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 bank’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 2008 and 2009, Community Bank’s three business units reported the following performance results:

1. Compute the bonus as a percent of salary earned by each business unit executive in 2009.

2. What factors might explain the different improvement rates for net income and customer satisfaction in the three units?

3. Community Bank’s board of directors is concerned that the 2009 bonus awards may not actually reflect the executives’ overall performance. In particular, it 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? Explain briefly.

Retail Banking 2008 Business Banking Credit Cards 2008 2008 2009 2009 2009 S2,800,000 S3,220,000 $2,900,000 S3,016,000 S2,750,000 S2,722,500 Net Income Customer satisfaction 73 73 70 69 79.35 75.6