Incentive Plans

 

 

GrowCo Engineering Incentive Plan

Performance in the engineering department had been less than satisfactory in terms of attendance, adherence to schedule, and drawing quality. In particular, engineers have been lax in getting to work on time and claim problems with schedule adherence result from last minute design changes being approved by the sales department. On January 3, 2015, GrowCo approved a 2015 short-term incentive compensation plan for its engineers. The plan provides the potential for an annual bonus based on individual performance. Engineers are to be evaluated annually on three major factors: (1) on-time attendance, (2) adherence to schedule deadlines, and (3) drawing quality (opposite of error rate). 20% of the bonus will be determined by attendance and the remainder will be determined by performance to schedule (40%) and drawing quality (40%). The following table summarizes the criteria to be used in determining the bonus amounts:

Performance Criteria	Criterion Weight	Threshold Performance Rating	Target Performance Rating	Maximum Performance Rating
On-time Attendance	20%	90%	95%	100%
Adherence to Schedule	40%	80%	90%	100%
Drawing Quality	40%	90%	95%	100%

Note: Threshold performance is the minimum level of performance qualifying for an incentive award; target performance is the level of performance qualifying for the full incentive award; maximum performance rewards performance above target with an additional incremental incentive payout.

For each criterion, at threshold performance, the individual payout is 50% of target bonus; there is no payout for performance below threshold. At target performance, the individual payout is 100% of target bonus. At maximum performance, the individual payout is 150% of target bonus. Individual payout is adjusted proportionately for performance between these values. For 2015, the individual bonus target is 20% of salary.

1. What would an engineer’s incentive payout be for 2015 if the engineer’s salary is $80,000 and he/she attains threshold performance for attendance, a schedule adherence rating of 85%, and a drawing quality rating of 97.5%? Interpolate as necessary. Show all work!
2. What is your evaluation of GrowCo’s incentive plan? That is, what do you like? What do you not like? What would you change? Explain the reasoning involved in your evaluation.