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Question: Community Credit Union (CCU) recently introduced a

Community Credit Union (CCU) recently introduced a new bonus plan for its business unit executives. The company believes that current profitability and customer satisfaction levels are equally important to the bank’s long-term success. As a result, the new plan awards a bonus equal to 1% of salary for each 1% increase in net income or 1% increase in the company’s customer satisfaction index. For example, increasing net income from $3 million to $3.3 million (or 10% from its initial value) leads to a bonus of 10% of salary, while increasing the bank’s customer satisfaction index from 70 to 73.5 (or 5% from its initial value) leads to a bonus of 5% of salary. There is no bonus penalty when net income or customer satisfaction declines. In 2014 and 2015, CCU’s three business units reported the following performance results:
Community Credit Union (CCU) recently introduced a new bonus plan for its business unit executives. The company believes that current profitability and customer satisfaction levels are equally important to the bank’s long-term success. As a result, the new plan awards a bonus equal to 1% of salary for each 1% increase in net income or 1% increase in the company’s customer satisfaction index. For example, increasing net income from $3 million to $3.3 million (or 10% from its initial value) leads to a bonus of 10% of salary, while increasing the bank’s customer satisfaction index from 70 to 73.5 (or 5% from its initial value) leads to a bonus of 5% of salary. There is no bonus penalty when net income or customer satisfaction declines. In 2014 and 2015, CCU’s three business units reported the following performance results:


Required:
1. Compute the bonus as a percent of salary earned by each business unit executive in 2015.
2. What factors might explain the different improvement rates for net income and customer satisfaction in the three units?
3. CCU’s board of directors is concerned that the 2015 bonus awards may not actually reflect the executives’ overall performance. In particular, it is concerned that executives can earn large bonuses by doing well on one performance dimension but underperforming on the other. What changes can it make to the bonus plan to prevent this from happening in the future? Explain briefly

Required: 1. Compute the bonus as a percent of salary earned by each business unit executive in 2015. 2. What factors might explain the different improvement rates for net income and customer satisfaction in the three units? 3. CCU’s board of directors is concerned that the 2015 bonus awards may not actually reflect the executives’ overall performance. In particular, it is concerned that executives can earn large bonuses by doing well on one performance dimension but underperforming on the other. What changes can it make to the bonus plan to prevent this from happening in the future? Explain briefly





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Retail Banking Business Banking Credit Cards 2014 2015 2014 2015 2014 2015 Net income $2,800,000 $3,220,000 $2,900,000 $3,016,000 $2,750,000 $2,722,500 Customer satisfaction 73 73 70 75.6 69 79.35


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