John Mendenhall seeks your advice on revising the existing bonus plan for division managers of News Report Group. Assume division managers do not like bearing risk. Mendenhall is considering three

John Mendenhall seeks your advice on revising the existing bonus plan for division managers of News Report Group. Assume division managers do not like bearing risk. Mendenhall is considering three ideas: ■ Make each division manager’s compensation depend on division RI. ■ Make each division manager’s compensation depend on company-wide RI. ■ Use benchmarking and compensate division managers on the basis of their division’s RI minus the RI of the other division. Q. Mendenhall is also concerned that the pressure for short-run performance might cause managers to ignore emerging threats and opportunities. system might Mendenhall introduce to prevent this problem? Explain briefly. Transcribed Image Text: ROI, RI, DuPont method, investment decisions, balanced scorecard. News Report Group has
two major divisions: Print and Internet. Summary financial data (in millions) for 2016 and 2017 are as
follows:
Home
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Formulas
Data
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Total Assets
A
в
Operating Income
Revenues
2016
2017
2016
2017
2016
2017
$18,700 $22,500
$18,200 $25,000
10,000
3.
Print
$3,720
$4,500
4 Internet
525
690
25,000
23,000
11,150
The two division managers’ annual bonuses are based on division ROI (defined as operating income divided
by total assets). If a division reports an increase in ROI from the previous year, its management is automati-
cally eligible for a bonus; however, the management of a division reporting a decline in ROI has to present
an explanation to the News Report Group board and is unlikely to get any bonus.
Carol Mays, manager of the Print division, is considering a proposal to invest $2,580 million in a new
computerized news reporting and printing system. It is estimated that the new system’s state-of-the-art
graphics and ability to quickly incorporate late-breaking news into papers will increase 2018 division
operating income by $360 million. News Report Group uses a 10% required rate of return on investment
for each division.

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