Introduction
The main principle of an incentive compensation plan is to motivate managers to act in the best interests of the organization and its shareholders. The basic idea of behind such plans is to pay for performance. Incentive compensation plans possess two important elements: measures of performance and methods of compensation. The following is an analysis about weather the proposed incentive compensation plan for Purity Steel Corporation's Warehouse Sales Division is the correct method of rewarding the branch managers. This is brought to attention when a branch manager wonders whether his new warehouse should be leased to alleviate the impact on return on investment (ROI).
Background
The Warehouse Sales Division (WSD) is an autonomous unit of the Purity Steel Corporation, an incorporated steel producer. The unit operates 21 field warehouses throughout the United States. In 1995 sales totalled approximately $225 million, half of the products sold were purchased from Purity Steel's Mill Products Division, using a market-based transfer price. Harold Higgins, a former member of the Mill Products Division, was appointed general manager of the Warehouse Sales Division. Higgins was responsible for the entire division's operations and growth. Sales volumes and rate of return on investment would be two components to help measure growth and overall performance. The Warehouse Sales Division is an investment centre, which operated as a centralized unit before Higgins' arrival. Following his arrival, Higgins decided to decentralize the management of his division by making each branch manager was held accountable for the division's profits and invested capital at each of the different locations. An incentive compensation plan was one of the key ...