We had to do something different. The company was doing great according to all the performance indicators we monitored, and our managers were earning nice bonuses, but the shareowners weren't benefiting.
-William Embleton
William Embleton, managing director of Berkshire Industries PLC, explained why his company had implemented a new incentive system based on an "economic profit" measure of performance starting in the year 2000. In 2002, however, Berkshire managers were questioning whether their new system had had its desired effects. The new economic profit measure did not seem to be any better in reflecting shareowner returns than did the old measure-accounting earnings-on which Berkshire managers had previously focused. And the new system was causing some management confusion and a perceived unfairness issue. Mr. Embleton had to decide whether to modify the new system, and if so how, or to replace it with something else.

Questions
1. Evaluate Berkshire's measurement and incentive system. Would you continue using the system? If not, why not? If so, what changes would you suggest, and why?
2. What, if anything, should Mr. Embleton do to alleviate the problem in the Spirits division?

EXHIBIT T Example Showing Effeet of Capitalization and Amortization of Consumer Advertising Expenditures (000) First year of use of new system 1999 1,200 300 1998 2000 2001 Advertising expense as reported on income statement 900 1,800 2,400 Amortization for economic profit report 1998 1999 2000 2001 Advertising expense on economic 300 300 400 600 400 600 800 400 profit report 1,300 1,800 Cumulative advertising expense on income statement) Less: Cumulative amortization 900 2,100 3,900 6,300 (economic profit report) 300 1,000 2,300 4,100 profit calculation of capital for economic profit report 1,600 2,200