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ACCA Strategic Professional · Advanced Performance Management · Performance and reward

Brinton Ltd sets a bonus for divisional managers at 5% of the amount by which divisional profit exceeds a target. Targets are negotiated with managers each year. Which risk is most likely to arise from this design?

The most likely risk is budgetary slack: managers negotiate easy targets and understate potential because their bonus depends on beating the target. Participation in target-setting combined with reward for exceeding it encourages gaming. Setting targets using external benchmarks or past trends can reduce this risk.

  1. AManagers will bargain for low targets and understate potential, creating budgetary slackCorrect
  2. BManagers will focus too heavily on long-term investment
  3. CManagers will have no incentive to exceed the target
  4. DManagers will be rewarded for factors outside their control

Explanation

When the target is negotiated and pay depends on beating it, managers have an incentive to build in slack by understating possible performance. Because the bonus increases above target, there is incentive to exceed it, so the third option is wrong. Nothing in the data suggests uncontrollable items or long-term focus.

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