Sarah Tesar is the lead partner of a medium-sized accounting firm. The eight partners share in an annual bonus pool. The characteristics of the bonus pool system include:

• The bonus pool size each year is calculated as 40 per cent of annual profit.

• The bonus pool is allocated on the basis of bonus units awarded according to the partners’ performance against target fees generated from new clients. This is meant to reinforce the firm’s strategy of growth through new client acquisition. If the fees target is met, one bonus unit is awarded; if the fees target is exceeded by 10 per cent, two bonus units are awarded; if the fees target is exceeded by 20 per cent, four bonus units are awarded; and if the fees target is exceeded by more than 20 per cent, six bonus units are awarded.

This year the annual profit was $2.2 million and the partner performance according to their fees from new client target was as follows: three partners achieved 10 per cent above target; three other partners achieved 20 per cent above target; and two partners exceeded the target by more than 20 per cent.

Required

(a) Calculate:

(i) The value of the bonus pool to be shared

(ii) The value of one bonus unit

(iii) The value of the bonus each manager would receive for the year.

One of the partners, Russell Morris, has sought a meeting with Sarah to discuss the shared bonus pool system. He wrote in an email to Sarah ‘I spend a lot of my time providing our in-house training programs . . . I can’t be out chasing new clients at the same time! Why do we only have one measure for the bonus system?’

(b) How important is the selection of the bonus allocation formula and the measure(s) to be used? 

(c) In the light of Russell’s email, would you advise Sarah to make any changes to the current system? Explain.