Return-on-Assets Incentives Over Profit-Sharing

“So we adopted a basic plan that involved incentive being tied to the return that the company earned on the divisional net worth. Our plan required that there would be no bonus unless the man- agement made at least 10 percent pretax on the divisional net worth and that the maximum bonuses could be reached if an un- usually high rate of return was made. Under the maximum bonus, the divisional president could earn ioo percent of his base salary, the second group could earn 75 percent; the third group 50 per- cent; and the next group 25 percent. It was our feeling that these plans should go far enough down in the organization so that every- one who had an opportunity to make or lose money for the com- pany as a result of their decisions should be included.”

“There is one possible defect with this plan, which we found a way to cure. Some managements might miss opportunities to ex- pand or diversify the division's business through the production of new products that required substantial engineering and develop- ment expense. We handled this problem by capitalizing those total development expenses for the purpose of determination of net”