Larry Smyth is the primary owner and CEO of a growing computer hardware distribu
ID: 444896 • Letter: L
Question
Larry Smyth is the primary owner and CEO of a growing computer hardware distribution company. The company has 120 employees, which includes 10 managers. Larry feels that there is a compelling need to boost employee morale, especially at the top. Seven of his ten managers are "just logging time." Most employees are paid by the hour. The managers are all salaried.
Larry has decided to adopt a cash bonus program for his 10 managers (something he has done sporadically in the past), in hopes that the plan will fire up the managers. He has decided to divide 25 percent of the pretax income of the business among the 10 managers in equal shares each year. The bonuses will be paid within two weeks of the completion of the yearend financials.
Larry has asked you to draft a bonus plan document that can be reviewed and approved by the other two shareholders (both of whom serve on the Board) and the managers. He has also asked you to share your thoughts on his plan.
What do you think of Larry's plan? Why might it be a waste of money? How might it backfire and create bigger morale problems? Is it oversimplified? What are the components of an effective cash bonus plan that Larry should consider? Does it make sense to limit the plan to managers? Is this something that a lawyer should even be concerned about? Why do you think Larry would ask your opinion? Use your common sense to ponder and answer these questions.
Explanation / Answer
Answer to the first question partially answered in the very next question that is raising the question- why it might be a waste of money. As per the narration, managers are already salaried as compared to other most of the employees getting hourly. Seven of the 10 managers are "just logging time". It is not clear whether managers are being paid lowly or there is very little to be managed or managers has untapped potential that can boost the company's performance. As per my understanding, any cash bonus scheme should not be restricted to managers alone secondly and that too not related with the performance of the individuals.
2. As mentioned above, the purpose, for which the cash bonus scheme is thought of, may not be achieved rather will lead to bigger problem as per next question.
3. As per my understanding, to divide 25 percent of the pretax income of the business among the 10 managers in equal shares each year as against nil to the other 110 employees needs proper justification. Again I repeat, cash bonus should be linked with the performance/ contributions of the employees to the total earnings. The fruits of hardwork of some employees may not be distributed among those who did not work enough to even justify their salaries.
4. The crucial component of the bonus plan is to motivate the employees to give their 100% contribution so as get the major part of extra earnings distributed among them equityably, in accordance with their contribution.
5 It does not make sense to limit the plan for managers alone.
6. There may be legal framework about payment of bonus to workers as well as to manager's eligibility and or lower and upper limits for distribution of income, that's why important to have legal advice.
7. Asking for my opinion and or others opinions always helps in making good decisions. Pooling of knowledge should be encouraged at all times.
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