Duckworth Industries

The following is a case study analysis of Duckworth Industries, in particular the company?s incentive compensation programs:

1 & 2) What are the different incentive compensation plan options covered in the case and what problems does each plan solve?

Mr. Duckworth believed in the power of incentive to guide management action. In order to better align the interest of the management with the shareholders, Mr. Duckworth implemented a variety of new incentive compensation programs:

The first incentive program implemented addressed tardiness and attendance. Basically, under this plan an attendance bonus ($0.60/hour) would be awarded to any plant-level employee who was never more than two minutes tardy for work each pay-period.

To ensure that quality became part of Duckworth Industries culture, a quality incentive program was implemented. Under this incentive program plant level employees and shift supervisors could earn up to an additional $100/month for meeting promised shipment dates and reducing the number of customer complaints. This quality incentive plan also helped foster an environment of teamwork between plant employees and their respective shift supervisors.

The next incentive plan implemented was a profit sharing plan (open to all employees). Mr. Duckworth knew that a profit-sharing plan would help bring groups of employees to work together toward a common goal (the success/benefit of the company). As part of this incentive plan a profit sharing pool was created which was equal to 15% of profits. At the end of the year the pool was then divided up given to employees pro-rata, based upon their individual wages. While some believe that a disadvantage of a profit sharing plan is that it focuses only on the goal of profitability, which may be at the expense of quality, Mr. Duckworth?s previous incentive plan had already addressed this issue (Compensation, 1999).

As an additional incentive, individual incentive programs were offered to personnel involved in sales and supervisory roles. This incentive plan provided these categories of employees a monetary incentive ranging from 10 to 40% of their base pay, for things such as order accuracy and turnaround and sales growth.

Historically, senior management (about 40 individuals) were all part of an annual incentive compensation plan, with a smaller subset of this group participating in a long-term incentive program. Both of these plans however, underwent considerable changes during the 1983-1992 decade due to the lack of participation, stemming from the narrowly defined targets needed to achieve the incentive award/bonus and the participation requirements. In attempting to achieve his overall goal of aligning the interest of management and shareholders Mr. Duckworth proposed a new Economic Value Added (EVA) Incentive System. Under this new incentive system, management?s pay was directly linked to creating shareholder wealth. This plan would give managers superior information - and superior motivation - to make decisions that will create the greatest shareholder wealth (Stewart, 2005). Another area that this new incentive plan would address is the complicated and complex calculations associated with determining the amount of incentive earned. Under EVA, the compensation formula automatically adjusts the baseline for calculated next year?s bonus to reflect actual performance of the prior year.

3) How might the EVA system influence the willingness of managers to accept job transfers across divisions at Duckworth Industries?

Applying the EVA system to employees that transfer across business units within Duckworth may pose a challenge to hiring managers during the first year of the hire since the EVA formula relies on prior year performance. Under the EVA system, the yearly incentive compensation paid to management is linked directly to the economic value they added to their unit. The components that go into calculating the Economic Value Added (EVA) for each business unit is: Net operating profit after taxes, average capital, and cost of capital. The EVA is calculated annually for each business unit by using a formula that ?automatically adjusts the baseline for calculating next year?s bonus to reflect the actual performance of the prior year? (Duckworth Case, UOP). Therefore, since employees? bonus is tied directly to this formula, and the formula is based on the performance of the prior year in the old department, it will be difficult to get an accurate bonus figure for the employee?s first year in the new unit.

4.) How should an incentive compensation plan adopted by a firm relate