Introduction
Aim
Currently, the compensation structure is based on divisional contribution numbers. This Compensation Report aims to analyse the potential problems within the existing compensation structure and recommend alternative compensation structures that Changing Motors can adopt.
Rationale
As Changing Motors embark on their expansion plans in the future, there is a greater need to improve overall efficiency. Employees’ efficiency stems from the effectiveness of compensation structure. It is critical for Top Management to constantly review and adjust existing compensation structure to detect and correct any ineffective performance measures. All these measures should, in turn, support the strategic objectives. An effective Management Control System should include effective performance measures and evaluation, which will also link to rewards or disincentives. Ideally, the compensation structure should promote goal congruence and employees motivation and exclude elements of uncontrollability.
Potential Problems with Existing Compensation Structure
Although the current divisional contribution margin compensation structure enables controllability and motivates each division to work hard, it lacks goal congruence throughout the company.
When managers are compensated solely based on divisional contribution numbers, divisional managers only focuses on divisional profits so as to gain their bonuses. On the other hand, Changing Motors’ main company goal is to not only be profitable, but also provide safe and reliable car products and services that customers can rely on. This issue of goal incongruence is related to the horizon problems and adoption of hard-selling tactic.
Poor emphasis on company’s long-term goals
The excessive emphasis on short-term contribution figures might cause divisional managers to lose sight of the company’s long-term strategic