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Quality Metal Service Center

Learning Team 6 | Section B

Company Background
o Metal Distributor - Mature, highly competitive and fragmented industry o Corporate Strategy
o To focus sales efforts on specialty metal users o To identify those industries and geographic markets where these metals were consumed o To develop techniques to increase market share

Organization Structure
Chairman

CEO

VP

District Manager

Sales Manager

Credit Manager

Warehouse Superintendent

Purchase Manager

Administrative Manager

Current Performance Evaluation and Incentives Incentive Bonus for District Managers linked to meeting & exceeding 90% of their ROA
75% based on District Performance 25% based on Region s Performance

Incentive Bonus for District Manager s Staff linked to performance of district

Investment Opportunity at Columbus District Capital Intensive Project Investment $600,000 10% Tax Credit was available on Equipment Cost of Capital 15% NPV of $286,000 Low Payback 4.5 Yrs compared to Company s Criteria of 10 Yrs Opportunity to expand into a new market

Ken Richards Decision to Invest in new Opportunity


YES 1. Increase in Share holder value, as the returns are above the cost of capital and there is EVA for the company. 2. Expand Business Line and enter into Processing Inventory. 3. For above $10,000 CAPEX, requires Corporate level approvals NO 1. Receives an incentive bonus of 11.1% as against 4.28% (Exhibit 5)

2. Loss of opportunity to GROW 3. No higher level approval

Pros & Cons of Current Evaluation System Pros


Efficient use of Assets Invest carefully considering Returns

Cons
Personal Incentives creates a bias in decision making Lack of R&D Initiatives by managers Does not measure EVA/ Share holder Value Misalignment of GOAL CONGRUENCE

Recommendation ACCEPT proposal - +EVA and Share holder Value Change Performance Evaluation
A mix of ROA & EVA Have ROA/EVA Slab structure Incentives Higher CAPEX level decisions to District Managers

Q&A

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