The manufacturing division manager of a computer chip company had traditionally been evaluated based on costs. As long as she could produce computer chips more cheaply than the previous year, she received her bonus. The initial benchmark for the bonus was established based on the first year of manufacturing a new computer chip;

however, the company recognized that this type of reward system for the manufacturing manager would no longer work. First, the product life of the computer chips was becoming shorter and shorter. Some computer chips were only made for a year. Second, the company had switched to target costing. The company’s customers would request a computer chip with certain characteristics, and at a price that the customer would be willing to pay. The engineers of the computer chip company then would attempt to design a computer chip with all the appropriate features that the customer wanted, and that also could be made cheaply enough to earn a profit. Once the engineers were satisfied that the computer chip had been appropriately designed, the company would sign the deal and turn the design over to the manufacturing division manager for production. The target cost based on the engineers’ estimate became the benchmark upon which the manufacturing manager’s bonus was based. If she could produce the new chip at below the target cost, she would receive a bonus.

The manufacturing manager did not like this new bonus system. She felt that the target cost was imposed on her and did not consider the problems of producing new chips, especially the learning process.

How could the process of choosing a target cost and using it as a benchmark for the manufacturing division affect the manager’s compensation?