There are three components to a bonus plan: the base of the bonus compensation (earnings, revenues,...), the bonus pool (firm-wide or unit-based), and the payment options (cash, stock options, ...). It is common in many industries, including the financial services industry, to use a firm-wide pool and revenue as the base for bonus compensation.
Required:
1. What are some alternative bases for compensation pools, in addition to revenue?
2. What do you expect the use of revenues, rather than some other base, will have on both the motivation of managers and the total bonuses paid to managers? Comment on the effectiveness of the revenue base relative to other options for the bonus compensation base.
3. Explain the likely motivational effects of the use of the firm-wide bonus plan for firms in the financial services industry.
4. Do you consider the firm-wide revenue plan for bonus compensation a fair method for determining bonuses? Why or why not?