Manag., July-2018 – Q52 Multiple Choice Questions

Answer
Comment
Array

Option : B

Explanation : The following three approaches are tailored to help match measurements and rewards with explicit strategic objectives and timeframes.
1. Weighted-Factor Method: This method is particularly appropriate for measuring and rewarding the performance of top SBU managers and group level executives when performance factors and their importance vary from one SBU to another. One corporation’s measurements might contain the following variations: the performance of high-growth SBUs is measured in terms of market share, sales growth, designated future payoff, and progress on several future-oriented strategic projects; the performance of low-growth SBUs, in contrast, is measured in terms of ROI and cash generation; and the performance of medium-growth SBUs is measured for a combination of these factors. (Refer to Table).
2. Long-Term Evaluation Method: This method compensates managers for achieving objectives set over a multiyear period. An executive is promised some company stock or “performance units” (convertible into money) in amounts to be based on long-term performance. An executive committee, for example, might set a particular objective in terms of growth in earnings per share during a five year period. The giving of awards would be contingent on the corporation’s meeting that objective within the designated time. Any executive who leaves the corporation before the objective is met receives nothing. The typical emphasis on stock price makes this approach more applicable to top management than to business unit managers. Because rising stock markets tend to raise the stock price of mediocre companies, there is a developing trend to index stock options to competitors or to the Standard & Poor’s 500.
3. Strategic-Funds Method: This method encourages executives to look at developmental expenses as being different from the expenses required for current operations. The accounting statement for a corporate unit enters strategic funds as a separate entry below the current ROI. It is, therefore, possible to distinguish between those expense dollars consumed in the generation of current revenues and those invested in the future of the business. Therefore, the manager can be evaluated on both a short - and a long-term basis and has an incentive to invest strategic funds in the future.
An effective way to achieve the desired strategic results through a reward system is to combine the three approaches:
1. Segregate strategic funds from short-term funds as is done in the strategic-funds method.
2. Develop a weighted-factor chart for each SBU.
3. Measure performance on three bases: The pretax profit indicated by the strategic fund's approach, the weighted factors, and the long-term evaluation of the SBUs’ and the corporation’s performance.
Table: Weighted-Factor Approach to Strategic Incentive Management

Strategic Business Unit	Category Factor	Weight
High Growth	Return on assets Cash flow Strategic funds programs (developmental expenses) Market-share increase Total	10% 0% 45% 45% 100%
Medium Growth	Return on assets Cash flow Strategic-funds programs (developmental expenses) Market-share increase Total	25% 25% 25% 25% 100%
Low Growth	Return on assets Cash flow Strategic-funds programs (developmental expenses) Market-share increase Total	50% 50% 0% 0% 100%