plan simple, clear, and consistent. Fairness also means that the plan strives to isolate the controllable aspects of the manager's performance. 5. Bonus Plans. Bonus compensation is the fastest growing element of total compensation and often the largest part. A wide variety of bonus plans can be categorized according to three key aspects: a, Base of compensation. The base of compensation is how the bonus pay is determined. The three most common bases are stock price, SBU-based performance, and the balanced scorecard. When stock price is used, the amount of the bonus depends on the amount of the increase in the stock price or whether the stock price reaches a certain predetermined goal. The bonus canbe determined in three ways. It can be based on a comparison of current performance to prior years, a budget or pre-determined target, or the bonus awarded to other manage nga ‘budget fora’ comparison to prior years, firms avoid the influence of uncontrollable factors. The choice of a base comes from a consideration of the compensation objectives. A common choice is to use SBUs because they are often a good measure of economic performance. i o b. Bonus pools. Bonus pools are the source from which the bonus pay is funded ‘A manager's bonus can be determined by the so-called unit-based pool that is based on the performance of the manager's SBU. The appeal of the unit-base polis the strong motivation for effective managers to pool set aside for this purpose. When the bonus pool is unit-based, the amount of the bonus for any ‘one manager is independent of the performance of the other managers. In contrast, when a firm- wide pool is used, each manager's bonus depends in some pre-determined way on the firm's performance as a whole. Therefore, the firm-wide pool provides an important incentive for coordination and cooperation among SBUs. i c. Bonus payment options, Payment options are how the bonus is to be awarded. The four most _ common methods are: hs 1. Current bonus (cash and/or stock) based on current performance 2. Deferred bonus (cash and/or stock) earned currently but not paid for two or more years. Deferred plans are used to avoid or delay taxes or to affect the manager's future total income stream in some desired way. 3. Stock options confer the right to purchase stock at some future date at a predetermined price. They are used to motivate managers to increase stock price for the benefit of the shareholders. 4, Performance shares grant stock for achieving certain performance goals over two years or more. G camScannerC. Tax Planning and Financial Reporting. In addition to achieving the three main objectives of compensation plans, firms attempt to choose plans that reduce or avoid taxes for both the firm and the manager. By combining salary, bonus, and benefits, accountants can maximize potential tax savings for the firm, and delay or avoid taxes for the manager. Firms also attempt to design compensation plans that have a favorable effect on the firm’s financial reports. : D. Management Compensation in Service Firms and Not-for-Profit Organizations. Although most compensation plans are used by manufacturing or merchandising firms, an increasing number of service firms are using these plans. Possible methods of performance measurement and compensationin : service firms include: 1. Profitability can be measured by a profit multiplier, the ratio of net revenues to direct labor ii pesos. ii : 2. Efficiency can be measured by staff utilization, which is determin labor hours chargeable (to the client) to total hours worked less vacation and holiday time. 3. Collection of accounts can be measured by two ratios: the percentage of accounts receivable ‘over 90 days or the average days of unbilled work outstanding. $ j E. Business Analysis. The goal of strategic cost management is the success of the firm in maintaining Ki competitive advantage, so we must evaluate the firm’s overall performance 3 as well as the performance CSFs have changed from prior years. 2. Financial Ratio Analysis. Financial ratio analysis uses financial statement ratios to evaluate the firm's performance. Two common measures are a firm's liquidity and profitability. Liquidity refers to the firm's ability to pay its current operating expenses and maturing debt. The five key measures of liquidity are accounts receivable turnover, inventory turnover, the current ratio, the quick ratio, and the cash flow ratio. The higher these ratios are, the better and higher the evaluation of the firm’s liquidity. The four key profitability ratios are the gross margin percent, return on assets, return on equity, and earnings per share. 3. Economic Value Added (EVA"). EVA’ is a business unit’s income after taxes and deducting the cost of capital. The cost of capital is usually obtained by calculating a weighted average of the cost of the firm's two sources of funds, borrowing and selling stock. EVA" focuses managers’ attention on creating value for shareholders. By earning higher profits than the firm’s cost of capital, the firm increases its internal resources available for dividends and/or to finance its continued growth. Bcamscanner