After Gonzales realized that they have been running the company like a

family, he came up with several strategic plans in order to make the

company more competitive. One those strategies were to come up with new
compensation plan which was based on the performance. The plan of Mr.
Gonzalez was to include all the managers, buyers and salesmen of the
company into the new plan. However after discussing with the consulting
firm, he was informed it was difficult for the plan to involve buyers and
salesmen due to the complexity of the sales. In developing the plan, the Mr.
Gonzales involved the head of human resource and chief finance officers who
were working together with consulting firm to develop the plan(Merchant&
Van der Stede, , 2003, pp.459-62).
After much consultation, the consulting firm concluded that it could not be
possible to involve the buyers and salesmen in their plan since measuring
their performance was found to be problematic. The Consultancy firm the
recommended that the company develop the compensation plan for the
managers only. The new incentive plans for the management had the
following features; bonus pool, ROI performance measure, bonus pool
allocation and different types of award. Just as it was noted before
implementation, the new plan had several concerns that could make it not to
work for the company. First, it allocated a lot of bonus to the managers
which could be too high for the company. Though the bonus were paid
according to the performance of the mangers as a way of motivating them to
increase their performance, bonus pool was too high for the company to pay
to the managers. It would increase the expenses of the company compared
to the benefits that were expected. Secondly, the new plan would create
division in the company since it was not fairly distributed to all the
managers. For instance the plan proposed store managers to receive 70% of
the bonus while corporate staffs and regional managers received 15% each.
Other groups such as regional sales were not covered by the plan and this
could create more division in the organisation. Applying the controllable
principle, managers are not held accountable for any performance outside
the variables they are controlling. Thus new plan may not be very fair since
managers are also supposed to be responsible for other agents such as sales
persons in order to improve the performance of the company. The
compensation of the managers should be based on the variables they control
so that the effort can be reflected on the outcome of those variables. The
new compensation plan in this company involves only managers and leave
all the other staff out who continue to be rewarded using the previous
method. It would be fair if the company sought to include other profit
players in the plan since they also play an important role in determining the
performance of the company. The new incentive plan benefits store
managers more than the other managers. Regional managers and corporate
staff receive only 15% of the bonus pool each which is very low compared

with what store managers are getting. This may create division among the
staff of the company rather than meeting the intended goal of motivating the
staffs in order to increase their performance. This in turn may increase
performance in some departments such as stores but others like in sales
department may not be motivated. This will affect the performance of the
company negatively thus affecting corporate profit of the whole company.

QUESTION TWO
The new incentive plan proposed the use ROI in measuring the performance
of the managers. According to the proposal, the bonus pool will be allocated
to the managers depending on their investment returns to the company. This
is calculated using the revenue from the bonus entitled to a manger minus
expenses from the variables controlled by the manager divided by the
investments of the store. The method is used in many companies especially
where the managers want to compare the performance of several projects
(Rachlin, 1997, p.245).
Though the company has many advantages that give it a wide usage in
many companies such as being simple, consistent and uniform, it has many
demerits that may make it difficult to be used in Gonzalezs company. First,
the use of ROI to measure the performance of the managers may not meet
the long term goal of the company. Managers may work tireless in order to
increase ROI and thus their compensation without meeting the long term
goal of the company. This may harm the company in the long term. Other
managers may not be a position to increase ROI due to some reasons such
as increased expenses that are not controllable which may be interpreted
that such managers are not performing. This may reduce motivation of
managers from those department noted as nonperforming thus affecting
the performance of the whole company.
Secondly, the use of ROI to measure the performance of the managers may
make some managers not to undertake some business opportunities that
may be profitable to the whole organisation but they have negative impact
to the performance of that manager. This is because managers will
concentrate only on those areas that are measured when determining their
performance. This will make the company to miss some opportunities that
may be very profitable to the company in the long term.
It may also be unfair for the Mr. Gonzalez to compare the performance of
managers from different departments using the same method. All the
departments of the company are different in terms of costs and revenue

depending on the operations that takes place in those departments. Some

have high expenses while others have low expenses depending on the main
activities of the department. This means that these departments will have
different ROI at the end of financial year. Again different managers have
different capabilities which will determine their ability to mobilize resources
for profit. Thus using ROI to measure the performance of the managers may
not be very accurate measure of their performance. Thus allocating the
bonus pool according to the ROI performance may not be a fair method for
Mr. Gonzalez to use to compensate managers.
Again the new incentive plans does not cover buyers and salesmen who play
a major role in the determination of the performance of the managers. Thus
rewarding managers alone because of increased performance in their
department without equally compensating other staffs such as salesmen
would not be fair and may result to conflict in the company. This will in turn
deter the performance of the company rather than improving it.

REFERENCES
Merchant, Kenneth & Van der Stede, Wim, 2003. Case: Las Ferreterias De
Mexico, S.A. de C.V. (Textbook page 459).
Rachlin, Robert, 1997. Return on investment manual: tools and applications
for managing financial results. First edition, M.E. Sharpe, Inc,New York.