Hcc Case
What is the company’s management structure? The company is divided into four Interco-case/” class=”ilgen”>operating divisions (Glasseal, Hermetic Seal, Hermetite and Sealtron) , each of which is run completely independent by a general manager. These managers are responsible for the whole business operated in their division except for the control function, which is run by the division controllers who report directly to Chris Bateman, the CFO.
The reason why control is separated from everything else is to ensure that there is autonomy and objectivity on the controller’s judgments: if they were reporting to the division managers and earning bonuses on the same basis than them, they would have an incentive to window dress the accounts and report a better situation than the real one. However, the disadvantage of this separation is that corporate monitoring and recommendations are not well seen by the division managers, who feel that they are being controlled by people who is not working day by day with them.
Additionally, there is a staffing department (legal and human resources division), which helps the whole company address problems related with those particular topics. As can be seen in Exhibit 2, the four division managers report on the Chief Operating Officer who at the same time reports directly to Andy Goldfarb, the President and CEO. However, this is not the top of the organization chart, since there is an additional level above: Jack Goldfarb, who is the Chairman of the firm. 2, 3 & 4. What are the primary differences between HCC’s new and old budget processes? What were the problems with the old system?
How did the new system address these problems? (PROCESS? ) HCC old budget system was based on stretch performance and aggressive targets, in order to stimulate division managers work at the hardest possible level.
This resulted in a continuously misachievement of goals making harder to earn the portion of bonuses related with performance. Since everybody in the company knew that the goals were too optimistic, it became normal to miss budget so that the workers were not motivated anymore: they knew that the target was almost unachievable and that nothing different would happen if they did not reach it.
By contrast, the new budget system is based on a minimum performance standard (MPS philosophy) which has to be reached in order to start earning extra rewards, trying at the same time to ensure that these standards are realistically set by the division managers making them definitely achievable. Then, above this first and sure performance standard, managers have to set targets that represent ordinary performance levels with a 50% probability of achievement. This way, it can be possible to distinguish between different levels of performance (standards), which had associated different extra compensations if achieved.
Bonuses were also allocated in a different way: in the old system, workers included in the bonus plan were assigned a bonus potential according to which additional rewards were paid depending on profit before taxes (PBT) and personal performance. Therefore, bonus were assigned on the basis of two kinds of measures: an objective measure (no bonus were paid if the PBT was below the 60%) and a subjective judgment (performance was evaluated by the top management in the basis of target accomplishment).
By contrast, in the new system the incentive compensation plan was different depending on the difficulty of the standards. Additionally, a bonus pool was created for each division composed by a 20% of the amount that the division’s PBT exceeded the minimum standard and a 25% of the amount that exceeded the target finally set. That bonus pool is definitely allocated to workers with similar criteria than before: based on the division’s PBT and target accomplishment in the different performance areas.
