Sm's Bonus Store Case Study Solution

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Register to read the introduction… The maximum number of bonus units are 6, with a lower cutoff level at 5% ROI and a upper cutoff level at 11% ROI. These cutoffs stipulate an acceptable minimum performance, while restricting superior performance. Denying bonuses for exceptionally good efforts can be justified by the fact that the performance results can be good luck. Moreover it, to a certain degree, ensures that the managers will not be myopic, which again ensures that the company will show a more steady performance improvement over time. Another reason for the upper cutoff level on the incentive payments might be a desire of not paying lower-level mangers more than upper level managers. In this case, a SM gets 72,547.32 pesos in average, RMs get 141,640.00 pesos, and CMs get 254,952.00 pesos. A top-performing SM cannot earn more than 118,189.68 pesos in bonus. This is less than the CM’s bonus, so in this case the upper cutoff definitely ensures that the lower-level managers cannot earn more than the upper-level …show more content…
Since ROI is the central element in calculating the bonuses, there is a risk of suboptimization, but since the bonus is partially determined through the corporate profit, the managers should also be concerned with the overall operating efficiency of the company. Ultimately an improvement within operating efficiency should lead to an increase in market shares. By tieing the rewards of the employees to the overall performance of the company, it would inevitably commit them – given that the employees have sufficient possibilities for influencing the results. In this case, the managers have a lot of responsibility and have many channels by which they can control and influence the results. Nevertheless, basing the bonuses partly on a group effort enforce cultural controls, as the employees are more alert of what their colleagues are doing, hence controlling whether they are working efficiently enough; “get to work; you’re hurting my profit sharing”. In this way, it makes good sense to base the bonuses on a proportion of corporate …show more content…
Whiz Kids Competition Number of managers % of bonus pool
Store Managers : 82 70%
Regional Managers : 9 15%
Corporate Managers : 5 15%

Bonus Pool
4.000.000+(8% of corporate income before taxes and bonuses in excess of 120000000)
4.000.000+(0,08*(176.230.000-120.000.000))
8.498.400

The bonus pool is then divided between the different groups: Store Managers : 70%*8.498.400 = 5.948.880,00
Regional Managers : 15%*8.498.400 = 1.274.760,00
Corporate Managers : 15%*8.498.400 = 1.274.760,00

To find the average amount per manager we divide the pools by the number of managers in the specific group Store Managers : 5.948.880/82 = 72.547,32
Regional Managers : 1.274.760/9 = 141.640,00
Corporate Managers : 1.274.760/5 = 254.952,00

The bonus pool for the top performing store managers: Total units in the bonus plan
6*1+9*2+11*3+20*4+15*5+8*6+4*6+3*6 = 302,00 Average pay per unit : 5.948.880/302 = 19.698,28 Store top performing managers (6 units) =

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