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Bonus plan/benefits vs. costs

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Your company currently has a bonus plan for its sales managers. If annual sales for a manager's unit exceed $1 million, the manager receives a $10,000 bonus. In a typical year, about 5 of the 10 managers in the firm meet the target and receive the bonus. However, the number receiving the bonus varies from year to year due to the state of the economy, which in turn has an effect on sales. The company is considering replacing the bonus plan with a plan that rewards the top-five selling managers each year with a $10,000 bonus. Discuss the potential benefits and costs of the new plan relative to the old plan.

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In simple terms the benefits are: improved work by managers in the intercompany environment. The costs are the amount of money on the bonuses themselves but that could easily be offset by the sales brought in by the managers.

This is a two tiered analysis. First, the managers will not have more of an incentive to work harder even in bad economic times since before with the million dollar ...

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