The Portimão Division of Amica Lda sells car batteries. Amica’s corporate management gives Portimão management considerable operating and investment autonomy in running the division. Amica is considering how it should compensate Manuel Belem, the general manager of the Portimão Division. Proposal 1 calls for paying him a fixed salary. Proposal 2 calls for paying him no salary and compensating him only on the basis of the division’s ROI (calculated based on operating profit before any bonus payments). Proposal 3 calls for paying him some salary and some bonus based on ROI. Assume that Manuel does not like bearing risk.
1. a. Evaluate each of the three proposals, specifying the advantages and disadvantages of each.
b. Suppose that Amica competes against Tiara-Iberica SA in the car battery business. Tiara is roughly the same size and operates in a business environment that is very similar to Portimão’s. The senior management of Amica is considering evaluatin gManuel on the basis of Portimão’s ROI minus Tiara’s ROI. He complains that this approach is unfair because the performance of another firm, over which he has no control, is included in his performance evaluation measure. Is his complaint valid? Why or why not?
2. Now suppose that Manuel has no authority for making capital investment decisions. Corporate management makes these decisions. Is return on investment a good performance measure to use to evaluate him? Is return on investment a good measure to evaluate the economic viability of the Portimão Division? Explain.
3. Portimão’s salespersons are responsible for selling and providing customer service and support. Sales are easy to measure. Although customer service is very important to Portimão in the long run, it has not yet implemented customer-service measures. Manuel wants to compensate his sales force only on the basis of sales commissions paid for each unit of product sold. He cites two advantages to this plan: (a) it creates very strong incentives for the sales force to work hard, and (b) the company pays salespersons only when the company itself is earning revenues and has cash. Do you like his plan? Why or why not?