Valley Commercial Bank wants to reward its branch bank managers for exceeding revenue growth targets and is considering alternative incentive formulas that award bonuses as a percentage of salary for each percentage point that actual revenue growth exceeds the target as follows.

Alternative 2 10%

8 percentage points Formula Parameter Alternative |

Revenue growth target 5%

Bonus percentage 4 percentage points Required

a. What are the motivational advantages and disadvantages of each of the four incentive formulas?

b. What are the advantages and disadvantages of the incentive formula approach to motivating revenue growth?