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ACCA Strategic Professional · Advanced Performance Management · Performance and reward

Delta Retail rewards store managers with a bonus based on store profit. Head office allocates a share of central marketing costs to each store, and the allocation changes unpredictably each year. Managers complain the bonus is unfair. Which is the best redesign to improve the scheme?

Base the bonus on controllable profit, excluding arbitrary central cost allocations. Reward should depend on factors managers can influence, so removing uncontrollable, unpredictable allocations makes the scheme fairer and more motivating. Raising the bonus rate or switching to revenue alone does not fix controllability and may distort behaviour.

  1. ABase the bonus on profit before allocated central costs, or on controllable profitCorrect
  2. BIncrease the bonus percentage so that managers are compensated for the uncertainty
  3. CReplace the bonus with a fixed salary rise
  4. DBase the bonus on revenue only

Explanation

Managers should be rewarded on items they can control. Using controllable profit removes the unpredictable allocation. Raising the percentage leaves the unfairness, and revenue alone ignores costs and margins, so it is not an adequate replacement.

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