Executive Summary
The case “Berkshire Industries PLC” gives a detailed examination of the situations that led to the introduction of a new incentive plan capable of meeting the demands of both workers and shareholders. The company had grappled with various challenges before, such as the ineffectiveness of the original reward plans and the inability to remain prepared for future changes and uncertainties in the industry (Merchant & Van der Stede, 2017). The existing issues led to a new plan suggested by Corey, Langfeldt, and Associates (LCA). The implementation of the economic profit-based incentive plan received the support of most of the decision-makers. Professionals in the field of management seemed to embrace the idea by referring to it as revolutionary and capable of meeting the demands of all key stakeholders.
However, the system triggered additional challenges within a period of two years, such as the recorded disparity between the gains of the managers and those of the shareowners, reduction in stock prices, and poor performance in the Spirits Division. These problems emerged at a time when some of the managers were receiving competitive returns or bonuses based on the accrued profits. These issues presented serious questions among the key stakeholders at the company (Merchant & Van der Stede, 2017). Some of the leaders were focusing on a superior or better system that was less confusing and capable of meeting the demands of organizational managers and shareowners.
Berkshire’s Motivations and Main Options
Berkshire wanted to introduce and implement a new incentive system due to various motivations. First, the management press had presented and popularized the “economic profit” model as revolutionary. Second, the company’s board wanted the interests of managers to be aligned with those of the major shareowners. They believed that the existing earnings per share (EPS) model was inappropriate and incapable of delivering desirable results. Third, the relevant board was keen to make the reward system and performance evaluation system more objective (Merchant & Van der Stede, 2017). Such approaches would reduce or do away with the subjectivity associated with the existing systems. With this kind of analysis, it is agreeable that the outlined motivations were reasonable and capable of delivering desirable results. The main options for a new system, therefore, included a model that was objective and the desire to ensure that all shareowners received competitive compensations. The option for the economic profit system sounded promising to the company.
Was the Economic Profit-Focused System Reasonable?
Despite the deliberations and guidelines Berkshire received from the consulting firm, Corey, Langfeldt, and Associates (LCA), the end result was that the economic profit-focused system was not a reasonable choice. The analyzed case study supports such a decision since most of the managers were unable to understand how it worked to support compensation. The model also failed to consider the real demands of the shareowners since it delivered negative outcomes even when the managers were getting positive results (Merchant & Van der Stede, 2017). The overall challenges and concerns recorded at the company revealed that a better and understandable system would be reasonable and capable of delivering the intended results. The model revealed that the company was making profits without necessarily supporting an increment in the overall stock price.
New Incentive Plan and Recommendations
The new incentive plan implemented at Berkshire Industries was aimed at meeting the demands of both the managers and the shareholders. Unfortunately, its promising attributes failed to make a significant difference at the company. Instead, additional problems emerged that had the potential to affect the overall success of the company. Most of the leaders identified it as complex and incapable of providing the intended original goals. Most of the individuals became discouraged, a new managerial confusion emerged, and the recorded stock price was quite low (Merchant & Van der Stede, 2017). These problems explain why a new model is recommendable for the company. A stock-based incentive plan is capable of motivating all managers while ensuring that the recorded stock prices are at par with the profits. The stakeholders and shareowners would find it easier to analyze the recorded gains and eventually achieve their goals.
Special Adjustments for the Spirits Division
The studied case reveals that the Spirits Division faced significant challenges in 2000 and 2001. Personally, I believe that the decision to offer erroneous economic profit figures or bonus payouts for this division could have significant implications on its long-term goals. Such a move would force the company to allocate additions to funds to meet such expenses. Incidentally, most of the beneficiaries of such bonus payouts would not feel the real impacts of such losses during the period in question (Merchant & Van der Stede, 2017). An honest application of the system would make it possible for all key stakeholders to make informed decisions and be aware of the most appropriate changes to the reward system. The best decision would be for Mr. Embleton to avoid making special adjustments to the bonus payouts or economic profit figures for the division.
Reference
Merchant, K. A., & Van der Stede, W. A. (2017). Management control systems performance measurement, evaluation and incentives. Prentice Hall.