Case Study: Rockstar PLC

2875 Words 12 Pages
Register to read the introduction… If, later in the year, management determined that the company would achieve its targets, they would release this reserve to the Investment Committee for spending on discretionary projects, most of which had relatively longterm payoffs. But in 2000 and 2001, none of this reserve was released to the Investment Committee. All of it was turned in to meet the corporate EPS targets. Senior managers at Rockstar PLC, a group of about 40 people, participated in an annual incentive compensation plan. Performance was evaluated based on achievement of earnings targets in the entity to which the manager was assigned: a division in the case of division-level personnel or the entire corporation in the case of corporate-level personnel. The target bonuses ranged from 20 percent to 90 percent of base salary, depending on the manager`s level of seniority. The plan allowed for subjective overrides of bonuses awards if superiors, or the compensation committee of the board of directors in the case of top management, felt that performance shortfalls were caused by factors beyond the manager`s …show more content…
Knowing their competition, the CLA consultants also directed some of their critique at systems that tried to link management incentives to elaborate combinations of measures. The multiplemeasurement systems, they explained, were usually hopelessly complex. The systems typically incorporated measures that were not directly linked with shareowner value. They included performance concepts that were vague (for example, personnel development) and supported by weak measures. And they rarely made the trade-offs among the multiple measures clear. The overall effects were diffusion of management attention and loss of understandability and accountability. The CLA consultants also recommended against the implementation of a stock-based incentive program. They pointed out that stock prices are affected by many external factors and are highly volatile in the short-term. They further explained that stock-based incentives are not an effective tool for motivating division- and lower-level managers who can have, at best, a modest impact on share prices. The measurement-focus of the CLA presentation was highly convincing to some of the board members. One remarked: This is what we need, one simple measure that goes up when shareowner value is created and that goes down when value is destroyed. If we get our managers focused on this measure, they will …show more content…
The new system had caused several problems and concerns. The board and the top management team were considering whether the system needed fixing. Some even questioned whether the new system should be continued. One problem was that the new system had created considerable management confusion, which persisted even after all the operating managers had attended a series of training sessions. Corporate managers thought that the operating managers would quickly learn how the economic profit measure worked, since their bonuses now depended on it. But a number of the managers seemed not to understand how the economic profit measure was computed, and some of them continued to manage their entities based on their old earnings-based management

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