Duckworth

The following is a case study analysis of Duckworth Industries; more specifically, it is an analysis of the company's multiple incentive compensation programs. The history of the company is rather remarkable. Mr. Duckworth created his own company in 1971 and has evolved it into a $125 million company by 1992. As president and controlling shareholder of Duckworth Industries, Inc., Mr. John Duckworth wanted to adopt a new incentive plan in efforts to integrate the interests of both shareholders and management of his company. He believed that managerial actions could be guided with the power of incentives. In the following pages are answers to five questions given in the course module regarding Duckworth Industry's compensation plans. The first and second question asks to determine the various incentive plans implemented and identify what problems it addresses. Being strong proponents of incentive plans, Duckworth Industries implemented numerous plans to address various problems. To address tardiness, Duckworth applied an attendance bonus. This meant that during every pay period, an additional $0.60 per hour was earned for those who were never more than two minutes tardy. To ensure quality performance, a quality incentive plan was adopted. Quality was measured based on the number of customer complaints or meeting designated shipment dates. This specific plan gave plant level employees to the supervisory level an additional $100 per month. The pool was equal to 15% of profits before tax in which at the end of the year the pool were given to employees pro-rata, which was based on the employees pay. The individual incentive program was directed to personnel involved in sales and supervisory roles giving them a monetary incentive ranging from 10 to 40% of their base pay.

Question three asks how might the new EVA system influence the willingness of managers to accept job transfers across divisions at Duckworth Industries. Since the mechanism for calculating incentive compensation plan allows for self-adjustment, this should positively influence a manager's willingness to accept interdepartmental transfers. The self- adjustment can be explained by describing the four mechanisms of the plan. First, the bonus target such as 37% is established. This means that a unit like phantom stock is assigned to each manager at a specific value and each manager would earn a desired level of bonus based on his/her individual performance. The second mechanism gives this system its self- adjusting property because the baseline EVA level is created where it would adjust the following year by half of the difference between the actual EVA gained and the baseline EVA for the previous year. This allows the targets to continue to remain within reaching distance. The third mechanism creates a base unit value and can be determined by how much of the target bonus could be ascertained by maintaining the status quo of business performance. The last mechanism is a bonus sensitivity factor where monies can be added or subtracted from the base unit in order to establish a total unit value.

posted by Donald Portier

The EVA program has both positive and negative aspects that may influence senior management's willingness to move. On the positive side, there is more of potential for senior management to control their bonuses by allowing them to move to perspective companies they feel would give them the most advantages and vice versa. The willingness to transfer is also dependent on the behaviors of the managers. Some managers may be go-getters whereas others prefer to maintain the status quo. On the down side, the EVA system determines its bonuses based on previous years and on their predecessor's performance. What happens to the senior manager's compensation when his or her predecessor has performed well or not so well? To address this issue, we suggest the EVA system to be adjusted according to individual behaviors and establish an individual index for the first year to avoid ill effects of their predecessors by following the senior management's every move. Question four asks how should an incentive compensation plan adopted by a firm relate to its industry type, market stability, and to the economic health of the firm? The relationship between industry type, market stability, and economic health of firm and the incentive plan can be determined in three steps. The first step is to look at industry type because it is clear that different industries will establish their unique baselines and react differently to market stability. Next step is to concentrate on past, present, and future market stability because a volatile versus a stable market will have a significant effect. The main goal is to create a formula that places adequate weight towards short-term performances while placing more emphasis towards