The human resources director has approached you, in a role as a controller, to assist in the development of compensation methods that would be based upon incentives. In preparation for this meeting you want to discuss some of the financial issues that have surfaced in some informal discussions. The methods of compensation and their impact on the financial model are not fully understood. The types of incentives and how they might relate to revenue generation also not clearly understood.
The human resources director has enthusiastic embraced total quality management and wants to develop incentive metrics based solely on customer satisfaction that produce cash bonuses. In a written communication to the human resources director, describe the financial issues that should be addressed when implementing incentive compensation programs. Type your communication in the response area below using the word processor provided. Reminder: Your response will be graded for both technical content and written skills.
Technical content will be evaluated for information that is helpful to the intended reader and clearly relevant to the issue. Writing skills will be evaluated for development, organization, and the appropriate expression of ideas in professional correspondence. Use a standard business memo or letter format with a clear beginning, middle, and end. Memorandum To:Human Resources Director From:Michael Schell Date: [ 10/7/2012 ] Re: Development of compensation methods based on incentives There are many financial issues that need to be addressed when implementing incentive compensation programs.
Prior to our meeting I wanted to address some of the financial issues that have surfaced in some informal discussions regarding this matter. It is not fully understood what the methods of compensation will be and what their impact will be on the financial model. It also is not clear what types of incentives will be used and how they will relate to revenue generation. Finding the right incentive compensation program for our employees is very important to keep and to attract the best employees but we must make sure we have a solid plan to pay for it.
Basing the incentive on customer satisfaction is important but it should also be tied into increased revenues. Compensation expenses may go up with the incentive program so we must have the revenue to pay for it or find other areas to pay for it. Using cash bonuses is one option for incentives but stock options or stock bonuses are another alternative. It is important to have the employees’ focusing on long term goals for the company and not just on short term gains.
Stock options may help encourage this behavior whereas cash bonuses can lead to short term incentives. One of the drawbacks to stock options is that the stockholders of the company may not approve of it because of the dilutive effect it could have on the stock price. It is important to weigh the options and decide what would be best for the company. I look forward to discussing these and other issues with you at our meeting. Please feel free to contact me with any questions or concerns that you may have.