24 Feb GrowCo Engineering Incentive Plan – C

Performance in the design engineering department of a major manufacturer had been less than satisfactory in terms of adherence to schedule, drawing quality, and the number of “mission-critical” complaints received from operations personnel. In an attempt to address these problems, on December 1, 2022, GrowCo approved a 2023 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. Individual factors include (1) adherence to schedule deadlines and (2) drawing quality (opposite of error rate). They will also receive a “group rating” based on the number of major complaints received by the department from operations personnel. 30% of the bonus will be determined by performance to schedule; 50% will be determined by drawing quality; and the remaining 20% will be determined by the number of mission-critical complaints received by the department. 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

Adherence to Schedule

30%

70%

80%

100%

Drawing Quality

50%

90%

95%

100%

Number of Mission Critical Complaints Received by Dept.

20%

5

2

0

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; that is, payout values are interpolated when they fall between set values. For 2023, the individual bonus target was set at 20% of salary.

1. What would an engineer’s incentive payout be for 2023 if the engineer’s salary is $100,000 and he/she attains target performance for adherence to schedule, a drawing quality rating of 97.5%, and the department receives a total of 3 mission-critical complaints during 2023? Interpolate as necessary. Show all work!

2. What is your evaluation of GrowCo’s incentive plan? That is, what do you like about its design? What do you not like? What would you change if you could? Is it consistent with the principles of individual incentive plans? Explain the reasoning involved in your evaluation.

NOTE: Interpolation is the computation of points or values between points that are known based on their relationship to other known points. For example, if performance is ¼ of the distance between the performance threshold and the performance target, then one might estimate that an incentive payout would be ¼ of the distance between the threshold payout value and the target payout value. See PPT included in this week’s module for additional explanation.