HCC Case Study PDF

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HCC Case Study...

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Case 4 HCC Industries, Inc. 1) What is the company’s management structure?  Organized into 4 primary operating divisions that are each run by 1 general manager  General managers are responsible for all of their division’s business functions  All divisions were largely self-contained and independent of each other 2) What are the primary differences between HCC’s new and old budget processes?  Old system: “Stretch” performance targets based on the belief that aggressive targets would push managers to strive to do their best o Bonuses paid were based half on profit before taxes (PBT) and half on subjective rating of performance o Bonuses were paid based on annual performance but payments were made quarterly  New System: uses “minimum performance standard” (MPS) budgeting style o Set so that the probability of achievement is 100% o “targets” are set to reflect a performance level considered to be beyond normal capacity o bonus pool now determined based on 20% of the amount by which actual division PBT exceeded MPS, plus 25% of the amount by which it exceeded the target o bonuses still paid quarterly at 90% of that earned, remaining 10% is accrued to be paid at the end of the year based on annual performance 3.1) What were the problems with the old system?  Makes the managers set performance targets on the more conservative side so they can get larger bonuses  Old plan allowed bonus payments if you missed a budget, so there was always something to shoot for if they came out short, however that would lead to people being lazier  Most of the division personnel included in the plan never knew their bonus potential nor the bases on which the bonus awards were made  Bonus payments typically not made until 3-4 months after the end of the quarter 3.2) How did the new system address these problems?  Changes the bonus pool so that if the division makes all their targets they will be paid the full bonus pool  If they miss a few targets, they can still earn 100% or close to 100%  If they only make half, they may only earn 60% of the pool  Division managers now have the power to decide which of their subordinates would share in the bonus pool and how it would be allocated among themselves  Bonuses will actually be paid quarterly

4) How does HCC arrive at budgets and targets?  Slightly different for each division but generally looking at past years’ numbers and information on the market for the next year  Ex. Hermetic Seal- division manager Mike Pelta sets budgets and targets based on previous years performance, sets budgets generally more conservative to create optimism and motivate people when they actually do exceed the budget o With new system Mike felt 95% confident that he would achieve target sales

5) How did (should) Andy Goldfarb treat uncontrollable influences?  Did not really do anything in regards to uncontrollable influences, was very hard on the Sealtron division in terms of their charter to make $1 million in PBT next year o However, both the division manager and CFO thought this was possible  Therefore, should take into account these uncontrollable influences to better the budgeting system 6) Will the changes motivate or demotivate division heads?  Could be motivational, however seems to be more stressful and demotivating especially in the Sealtron division where they are not expecting to make bonuses with this new budgeting and therefore causing a salary freeze which would cause employees to leave the company  For divisions currently doing well, it makes the potential bonuses much greater and more desirable, in the Hermetic Seal division the new changes are beneficial  Especially in divisions facing a harder time, reinforcing people is important through bonuses to show that they are doing a good job 7.1) What would Michael Jensen say about the new and old budget process and incentive compensation system?  I literally have no idea who the fuck Michael Jenson is so idk about this 7.2) What do you think about the changes?  I think if the changes can be implemented correctly then they can be beneficial  But the management definitely needs to come up with a way to deal with uncontrollable situations without hurting the division manager or employees...