homework

Executive Compensation Jensen Corporation is a holding company with several diversified

divisions
operating throughout the United States. Jensens management allows the divisions to operate on
an autonomous basis in most areas; however, the corporate office becomes involved in
determining
some division strategies related to capital budgeting, development of marketing campaigns, and
implementation
of incentive plans. The area of incentive plans has often been a problem to Jensen because
many of the companies it has acquired already had such plans in place. These plans are not easily
changed without causing discontent among the managers. Jensen has striven for consistency
among
its divisions with regard to bonus and incentive plans, but this has not always been achievable.
The restaurant division operates a chain of vegetarian restaurants, Hobbit Hole, in the eastern
United States. Jensen acquired it approximately three years ago and has made very few changes
to it.
The restaurants reputation was well established and, aside from nominal changes in marketing
strategy,
the chain has been allowed to operate in much the same manner as it did before its acquisition.
In addition to a base salary, Hobbit Hole unit managers participate in the restaurants profits.
This
incentive plan was in place when Jensen acquired the chain; although the profit percentage might
vary among restaurant units, the overall plans are basically the same. The unit managers are
satisfied
with this incentive strategy, and Jensens management does not believe that changes are
necessary.
Jensens motel division was formed 15 years ago when Jensen purchased a small group of motels
in
the Midwest. Since that time, the division has grown significantly as the company has acquired
motels
throughout the country using the name Cruise and Snooze Inns. Since its initial motel purchase,
Jensen
has implemented its own incentive program for unit managers in the individual motels. The
incentive
program provides annual bonuses based on the achievement of specific goals that are not
necessarily
finance oriented but pertain to areas such as improved quality control and customer service. This
program
requires administrative time, but Jensen believes that the results have been satisfactory.
Required
1. Hobbit Holes restaurant unit managers are covered by a profit participation incentive plan.
Discuss the
following for this incentive plan:
a. Its benefits to Jensen Corporation.
b. The incentive effects that it could cause, if any.
2. The Cruise and Snooze Inns motel unit managers participate in an incentive program based
on goal
attainment. Discuss the following for this type of incentive plan:
a. Advantages to Jensen Corporation.
b. Disadvantages to Jensen Corporation.
3. Having two different types of incentive plans for two operating divisions of the same company
raises
questions.
a. Describe the potential negative incentive effects of having different types of incentive plans
for
Hobbit Hole and Cruise and Snooze Inns.
b. Present the rationale that Jensen Corporation can give to the unit managers of Hobbit Hole and
Cruise and Snooze Inns to justify having different incentive plans for two operating divisions of
the
same company.
(CMA Adapted)