Read the following scenario and then thoughtfully discuss the questions JetSuite

Question

Read the following scenario and then thoughtfully discuss the questions JetSuite, a private jet charter company, prepares the master budget by taking each division manager's estimate of revenues and costs for the coming period and entering the data into the budget without adjustment. At the end of the year, division managers are given a bonus if their actual division profit exceeds the budgeted profit. it Discuss What problems do you see with this system? What are the dangers of using only business unit measures to evaluate the performance of business unit managers? . . Recently you overheard a manager at JetSuite saying "If every division manager maximizes divisional income, we will maximize firm income. Therefore, divisional income is the best performance measure." . Comment on and discuss this statement

Explanation / Answer

(1) Problems that I see in the system:

The approach that 'JS' goes with is risky as organizations cannot depend only on the respective division's performance. Most of the organizations follow the practice of weighted average when it comes to paying bonus at the end of the year to their managers. For example, 40-30-30 principle. 40% comes from overall Organizational Performance, 30% comes from Business unit level performance, 30% comes from the Individual's Performance. By this way, there is always a well-balanced approach where there is a fair mechanism of incentivizing. the managers. So in this case, if all the respective divisions perform well and the overall sales performance of the organization is poor, there won't be estimated profit. However, the company will end up paying bonus. Hence, the 'JS' approach is risky if it only takes division managers performance for a bonus payout.

(2) Danger's of using only Business Unit measures to evaluate the performance of business unit managers:

As I mentioned in the previous question, considering only business unit performance is a risky measure as the organizational overall performance not only depend on the respective business unit but also on other functional and non-functional departments viz., sales & marketing, finance, HR, operations, facilities etc., Ultimately, the profit for the company is determined based on its volume of sales of its products. If that factor is not accounted, the company may end up paying bonus even if they wouldn't have achieved the expected profit.

(3) To comment and discuss the statement:

It is inappropriate to assume that if every division manager maximises divisional income, it increases the firm's income. This is not the best performance measure. As I mentioned in the previous two questions, it is imperative for an organization to consider overall sales performance of the organization, Division level performance, and individual performance as well in order to do the bonus payout.

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