Finance

posted by .

Wanstead Engineering

Case 9
The annual bonus for senior managers at Wanstead Engineering was first agreed in 1998. Since then the company has seen no need to make any changes to the way in which the bonus is calculated. Both shareholders and managers agree the bonus is important, as it is a major factor in motivating and rewarding managers to maximize the agreed corporate objectives. The bonus scheme has also helped the company to retain senior managers. Shareholders want to see a steady improvement in the share price for a given level of risk and the directors are responsible for designing the remuneration systems.

Details of bonus calculation

The original forecast presented by managers was prepared on the assumption that no funds were available for investment in new products. Investments that have already been approved are considered essential to maintain current production capacity.

Original forecast – no funds available for investment in new products

Year 2001 2002 2003
*Profit £6 million £5 million £4 million
Capital employed (at beginning of year) £77 million £79 million £81 million

*Profit is calculated before tax and interest

The bonus is calculated by multiplying the ROI percentage by £1,000 if the capital employed is below £80 million and by £1,100 if the capital employed is greater than £80 million.
The group ignores tax and depreciation when calculating bonuses and the capital employed is the opening balance at the start of each year and excludes cash balances which are held in a group account


Example: Capital employed = £50,000,000
ROI = 7.143%
Bonus = 7.143 X £1,000 = £7,143







Investment in new products

After receiving the forecast above senior managers were asked to identify three investments in new products. The company has been asked to only consider projects with cash inflows in 2002 and 2003. Although the senior managers were asked to identify 3 projects only 1 would be accepted.

Cost of capital is 10%

Project 1
Year 2001 2002 2003
Cash flow -£5 million £4.5 million £1.5 million
Net present value £330,579


Project 2
Year 2001 2002 2003
Cash flow -£2 million £0.1 million £3 million
Net present value £570,248


Project 3
Year 2001 2002 2003
Cash flow -£0.5 million Nil £1 million
Net present value £326,446


Questions

Question 1

Discuss why the bonus scheme could result in poor decisions and cause conflict between shareholders and senior managers.

Question 2

What changes would you like to see to the way in which bonus is calculated? Discuss why strategy is important when identifying financial objectives for a business unit.

Respond to this Question

First Name
School Subject
Your Answer

Similar Questions

  1. biomedical engineering

    my major for college is biomedical engineering and i was looking athe salaries and they were around 50K to 80K. and i was wondering if there is a highest level you can get to by doing biomedical engineering where the salary increases …
  2. math plz

    A sales manager was given a bonus of $6,350 on the year's sales of $440,000. When answering the following questions, please make sure your final answers are in percentage form and are accurate to 2 decimal places. For example 34.56%. …
  3. managerial finance

    The annual bonus for senior managers at Wanstead Engineering was first agreed in 1998. Since then the company has seen no need to make any changes to the way in which the bonus is calculated. Both shareholders and managers agree the …
  4. Algebra

    "A recent study determined that the distance employees at a pharmaceutical company in New Jersey commute to work each way is normally distributed with a mean equal to 13.4 miles and a standard deviation of 3.6 miles. Management has …
  5. Accounting

    I need help in working this problem...please help... Gaines Company recently initiated a post audit program. To motivate employees to take the program seriously, Gaines established a bonus program.Managers receive a bonus equal to …
  6. finance

    company starting salary 75,000 retirement benefits 401k with annual contribution of 5% company will match 3% (for max contribution of 8% salary) avg 401k return within mutual fund options at 8% per year sign on bonus 0 annual bonus …
  7. math

    Julia had 150 fewer bonus points than Kelly.Bothgirls used tthe same number of bonus points. Julia was left with 1 out of 2 of her bonus pointand Kelly was left with 3 out of 4 of her bonus points.how many bonus did Kelly have at first
  8. Math

    Could someone please show how this is done or explain how to do it. thank you The pie chart below shows how the annual budget for a certain company is divided by department. If the amount budgeted for Editorial and Engineering combined …
  9. science

    Write a java program using classes and object to read the em[loyee code (Integer), Imployee name (string), Basic salary )double), Category (Character)then calculate the bonus(double)and the total salary(double)eligible for each employ. …
  10. computer,science, java

    Inorder to motivate the employees, the company has decided to announce the different types of bonus depends up on the employee’s Grade. If the employee belong to Grade A bonus=20% basic Grade B bonus=15% basic Grade C bonus=10% basic …

More Similar Questions