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ACCA Strategic Professional · Advanced Performance Management · Performance and reward

Brandt Logistics sets a manager's bonus at 10% of operating profit above a budget target of $4.0m. The manager has helped set the budget. Actual operating profit is $5.2m. The bonus is capped at $90,000. What is the bonus paid, and which behavioural concern does the participation in budget setting most clearly raise?

The bonus is $90,000, because 10% of the $1.2m excess profit is $120,000 but the cap limits it. Because the manager helped set a target he is paid for exceeding, he may have negotiated an easy target, creating budgetary slack.

  1. A$90,000; budgetary slack may have been built into the targetCorrect
  2. B$120,000; budgetary slack may have been built into the target
  3. C$90,000; the target may be set too high and demotivate the manager
  4. D$120,000; the manager may ignore non-financial measures

Explanation

Excess profit is $5.2m - $4.0m = $1.2m; 10% = $120,000, but the cap limits payment to $90,000. When managers set their own targets and are rewarded for beating them, they have an incentive to negotiate easy targets (slack). The $120,000 options ignore the cap.

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