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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.
• 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!
• 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.
