Janet Kaniva is the head of the sales department for a large book distributor. She manages a team of five salespeople, including her close friend, Ima Lyer. Each salesperson is responsible for particular product lines and is entitled to receive an annual salary bonus provided that he or she exceeds the profit forecast for his/her product group by more than to per tent. Profit for each product group is estimated by deducting from sales revenue the cost of the books sold, plus a charge for corporate overheads. Corporate overheads are allocated as a percentage of sales revenue, using a complex formula based on different percentages of revenue for different product lines: and salespeople can never make any sense of their annual overhead charge.
As the year end approaches, Lyer, who sells religious and philosophical texts, learns from the accountant. Stanley Piteous, that she will not receive a bonus, as she will not achieve her annual profit forecast. She is feeling very frustrated, as she has heard that the rest of the sales team will come in more than 20 per cent above their forecast.
Lyer approaches Piteous suggesting that an accounting entry is made to move some of the overhead charges to the other salespeople, who, after all, will still earn their bonus. Piteous refuses on the grounds that he is a CPA. but he is subsequently instructed by Kaniva to make this journal entry.
1. Explain how the bonus system is leading to unintended behavioural outcomes.
2. What relevance does Piteous’ CPA status have to this situation?
3. Now should Piteous respond to Kaniva’s instruction to move overhead charges from Lyer to the other salespeople? Explain your answer.