COMM414 Case 2: HCC

Chloe Chan 10089132

COMM414 Case #2:

HCC Industries
For: Professor Kurt Schobel
Due: Tuesday, October 20, 2015

Due: October 20, 2015

COMM414 Case 2: HCC

Chloe Chan 10089132

Due: October 20, 2015

Chloe Chan (10089132)

Executive Summary
This following report highlights the main issues that HCC is currently facing and how
they prevent the public company from meeting its targets under the new budgeting and
incentive philosophy. The key problems include: missing targets, lack of motivation, and
lack of transparency. The report then outlines the possible alternatives that HCC can take
to combat these issues. Final recommendations are to be implemented immediately in
order to maximize effectiveness. The recommendations are: (1) communicate financial
data to division personnel and (2) re-assess bottom-up budgeting method. Upon
successful implementation, the company will be able to re-align its operational strategy to
meet HCCs long-term vision while achieving its immediate targets.
Situational Analysis
Company Structure
There were four divisions within HCC: Hermetic Seal, Glasseal, Sealtron, and Hermetite.
All the divisions manufactured connectors, with the exception of Hermetite, which
specialized in micro-electronic package production. They all operated independently as
each served different customers, had different part number systems, product standards,
and accounting and information systems. Management believed that decentralization
would be effective in providing managers with greater autonomy to manage their
respective divisions.
Budgeting Philosophy
Prior to 1987, HCC demanded that its division mangers must meet stretch performance
targets. Managers were unable to attain these unrealistic, overly optimistic objectives.
Thus, not only was motivation understandably dampened, employees did not receive
bonuses.
The updated philosophy involved managers establishing minimum performance
standards (MPS) and missing budget would cost them their jobs. MPS budgets were to
be set so that the felt probability of achievement was 100%. Corporate management felt
that division managers had weak budgeting skills, thus division managers budget
proposals must go through a comprehensive and lengthy approval process which
contribute to inefficiency. Despite managements meticulous efforts, some of the
divisions missed their MPS by large margins.
Evaluation of Divisions Performances
In order to assess the performance of each division within HCC, management adopted
seven key performance criteria. Among these metrics, the company placed the most
emphasis on profit before tax (PBT). Division and corporate management would agree on
performance standards during the companys formal planning process, a critical activity

COMM414 Case 2: HCC

Chloe Chan 10089132

Due: October 20, 2015

that would conclude just before the new fiscal year.

Firstly, division managers projected sales forecasts. They then collaborated with
operating managers to prepare expenses, capital expenditures, and cash flow. Next,
corporate management would review and revise the targets. Lastly, the budgets were
presented to the board of directors for final approval. The approved budget would
become a fixed evaluation standard for each of the four divisions.
Bonus Plans & Incentives
The budget targets had direct impact on employees who qualified for the bonus plan.
Should division managers meet their targets, they would receive a bonus of 30% of their
base salary. The bonuses paid were based half on PBT and half on subjective rating
performance.
The subjective evaluation was based on corporate managements judgment of the degree
of accomplishment of the targets in all seven performance areas. Not only did division
managers raise concern about the accuracy of the subjective portion of the assessment
and the delayed payments, their subordinates were dissatisfied with having no
information on what their bonus potential was or the bases on which the bonus awards
were made.
Performance Monitoring
The COO, Al Berger, was responsible for monitoring division performance by reviewing
performance report meticulously and contacting division managers frequently. Each
division was required to write a commentary explaining its results. Berger placed higher
emphasis on meeting quarterly budget than monthly budget.
Issue Identification
There are 3 key issues that HCC must address immediately.
Issue #1: Missing Targets
Experience told Andy Goldfarb, the CEO of HCC, that stretch performance targets
derived from the great incentive plan of 1982 were described as a pie in the sky. The
divisions were unable to reach the overly optimistic targets. Thus, his intent of operating
with the new minimum performance standard (MPS) was to enable division managers to
submit budgets that they deemed as realistic and could be achieved with 100%
probability. However, in addition to MPS, he required managers to set targets that
reflected performance level considered above-normal capacity. According to Berger,
these goals represent 50% probability of achievement; the likelihood of meeting the new
targets was even lower than that of the former stretch performance targets (between 75%
to 80%).
Issue #2: Lack of Motivation

COMM414 Case 2: HCC

Chloe Chan 10089132

Due: October 20, 2015

While it is true that the HCC competed in two distinct markets (connector and microelectronic packages) and PBT goals were expected to differ across divisions, there was
huge discrepancy in budget setting philosophy between division managers and corporate
staff. Management questioned the division mangers abilities to set budgets because most
of them had engineering background but with no business training. Management also
failed to communicate clearly to division managers about their expectations, resulting in
proposed budgets that were either too conservative or too aggressive. Between the CFO,
COO, and division management, there was inconsistency in felt probability of budget
achievement (e.g. With respect to Sealtrons target set in March 1987: division manager
had 60%; CFO had 90%; COO had 100%).
Issue #3: Lack of Transparency
HCC lacked transparency between organizational levels, which fostered distrust and
frustration among employees. Particularly, employees that were eligible for the bonus
plan did not understand their bonus potential or the bases on which the bonus awards
were made. This was a result of division-level managers keeping financial results private,
as they feared that their subordinates would leak information to competitors. Chris
Bateman, the CFO, indicated that management would involve general managers in longterm planning (over two years) discussions only occasionally. Without any
communication of HCCs long-term strategies, it is unsurprising that management viewed
Hermetites general manager, Alan Wong, as nave when they were merely unaware
that they must meet certain expectations from upper management.
Issue Analysis
Issue #1: Missing Targets
The old stretch target system required division managers to assess their actual
performance against their targets. This was an advantage as it presented employees the
opportunity to redeem themselves if goals were not met. Managers were satisfied with the
fact that their COO was lenient with explanations on missing monthly targets. In
addition, they only needed to achieve 60% of the budget in order to enjoy bonus
payments. For the most part, the stretch budgeting concept was well received amongst
division management.
Conversely, because the stretch budget targets were widely known across the organization
to be too optimistic, division managers fostered a culture of being OK to miss budget.
It was clear that they did not have the motivation to truly meet stretch targets because
they would still be rewarded as long as they met 60% of the budget at a minimum.
Furthermore some divisions were able to achieve targets while others did not. This
caused the corporate staff a great deal of stress and frustration. While Hermetic Seal and
Glasseal divisions were able to achieve their own stretch targets, HCC as a whole had not
been able to meet any high-level organizational objectives.

COMM414 Case 2: HCC

Chloe Chan 10089132

Due: October 20, 2015

Under the new budgeting philosophy, Andy Goldfarb wanted general managers to
propose budgets for their respective divisions. This bottom-up budgeting approach,
aligned with HCCs decentralized system, provided division managers with the
opportunity to participate in making key decisions, thus improving employee morale. The
other advantage with the approach is its accuracy. Managers were actively involved in
day-to-day operations and it was reasonable to assume that their estimates were more
precise and realistic compared to what corporate management could predict.
In reality however, there were major flaws with this method at HCC. Budgets must go
through a lengthy review process facilitated by upper management until they were finally
presented to the board of directors. Carl Kalish (Glasseal Manager) and Lou Palamara
(Sealtron Manager) both faced pressures from corporate staff to increase their PBT
targets in their proposed budgets. As a result, not only did they perceive management to
be dictatorial, the two managers also feared that their jobs were in jeopardy (since they
would get fired for failing to meet MPS). Evidently, HCC operated with a top-down
target setting approach, which counteracted all the benefits associated with bottom-up.
Issue #2: Lack of Motivation
Each division manager had a different goal-setting philosophy. Subsequently, their
performance rewards (bonus payments) would vary.
Mike Pelta (Hermetic Seal) vs. Management
Mike Pelta, the general manager of Hermetic Seal, had the most conservative approach
in goal setting. Even though he was required to report to corporate management, he had
an advantage during the budget negotiating process with Al Berger, the COO. This is due
to the fact that Pelta was a major HCC stockholder the co-founder of the company. His
special, longstanding relationship with the company alluded to his influence and power
over most employees, including those at corporate level. Berger, who was a recent hire in
1987, was unable to persuade him. Pelta explained, [t]hey cant make me do something I
cant do. Clearly, no one had control over his goal setting approach. Furthermore, HCC
acknowledged that he was (1) poor at managing his subordinates and (2) nearing his
retirement age. Therefore, his ability to reach conservative budget goals for 33 years
consecutively was not due to luck or his superior work performance; rather it was
managements inability to address what they considered as a serious problem.
Carl Kalish (Glasseal) vs. Management
Since his market projections in the past four years had been highly accurate, Carl
Kalish Glasseals general manager, felt very confident in submitting his 1988 budget
proposal of $7.4 million in bookings and $7.2 million in shipments. Though management
had pressured him into increasing his targets, Kalishs confidence level of achievement
remained the same at 90%. This revealed that he, like Mike Pelta, had been setting
conservative goals in the old stretch target system. The unaffected felt probability proved
that he knew that his goals were easy to meet; he did not have a strong motivation to
establish more challenging goals because he did not receive pressure from management
HCC was operating under the former stretch budgeting concept.

COMM414 Case 2: HCC

Chloe Chan 10089132

Due: October 20, 2015

Lou Palamara (Sealtron) vs. Management

Tension was created when Sealtrons division manager, Lou Palamara, tried to justify his
$900,000 PBT target to the CEO, who demanded a PBT goal of $1 million. Not only was
the back-and-forth process cumbersome, Palamara felt discouraged that the unrealistic
target would cost him his job. Next, Sealtron missed its targets during the 1987 fiscal year
and employees within the division did not receive bonuses. This raised huge concern
since other divisions were rewarded as long as they met 60% of the budget goal.
Palamara believed that, without proper compensation, attracting and retaining talent
would become problematic. Here, his priority was not to meet PBT target, rather it was
to hire talent because his motivation stemmed from improving HCCs long-term
profitability.
Issue #3: Lack of Transparency
It is logical to limit financial information access to only to those who are involved in the
budget setting process namely corporate management and division managers. Sharing
too much information with division personnel might overwhelm them, as financial
statements are difficult to comprehend. At the same time, HCC is a publically traded
company, thus its financial information is required to be accessible by people inside and
outside the organization.
Management failed to communicate its (1) long term strategy to division managers and
(2) intent of increasing PBT goals for Glasseal and Sealtron. The absence of clear,
consistent communication contributed to managers inability to meet managements
expectations. For instance, Lou Palamara assumed that it was his job to make a company
long-term investment by hiring talent. However the CFO believed that the organization
could not afford any fat. Another example is where Alan Wong aimed for optimistic
targets; he assumed that HCC wanted his division to become a profitable operation. But
the COO thought he was nave. This caused tension and awkwardness between division
managers and corporate staff.
Another concern was that the evaluation criteria were too subjective, according to
division managers. On the other hand, a subjective performance evaluation was more
efficient for upper management to process.
Recommendations
Firstly, it is recommended that division personnel are provided with very high-level
updates on quarterly performances. Have division managers perform the following steps
four times a year:
1. Extract key information from financial statements, then summarize data
2. Present data in a friendly, easy-to-understand format in front of division personnel
(those who qualify for bonus plans)
3. Outline how their bonuses are impacted by that particular quarters performance

COMM414 Case 2: HCC

Chloe Chan 10089132

Due: October 20, 2015

Should personnel request to view the companys income statement for cross-referencing,
make it a requirement for them to sign appropriate nondisclosure agreements and
performance contracts. This will ensure all parties are legally protected. It is imperative
that these forms are signed before management distributes the income statement to the
individuals who made the request. By doing so, HCC will improve its transparency
across levels and instill trust in its corporate culture.
Secondly, HCC should stay true to bottom-up budgeting method and allow division
managers to set their target goals. Since budget of 1988 have already been approved, no
adjustments can be made. However, Andy Goldfarb should immediately distribute
company-wide letters indicating the following:
- Division managers have absolute control over 1989 quarters budget; they will set
their own target goals in all seven performance areas (PBT, Bookings, Shipments,
Returns, Rework Aging, Efficiency, Delinquencies)
- Corporate management may ONLY act as a guidance during the budget planning
process that will take place from 1988 December to 1989 mid-March. They can
provide advice, upon division managers requests; but their opinions will not
impact general managers final decisions in any way
- Consequently, the budget negotiation process will be removed as division
managers will be fully responsible for setting their own targets
- To discourage division managers from setting excessively easy targets, the
average PBT results from 1988 Q1 to Q4 will serve as the new MPS for 1989
- The division that shows the highest growth (1989 MPS vs. 1989 Target) by the
end of 1989 fiscal year is subjected to receiving 40% bonus of base salary within
the first quarter of 1990
- Those who do not meet the target will not be penalized
- This budgeting and incentive concept is effective from 1988 December to 1990
November (one year)
Rather than penalizing managers for not meeting targets, Andy should reward the
manager who can lead the highest growth. For example, if Sealtron divisions actual PBT
is $195,000 in 1988, it will become Lous MPS in 1989. He must establish a goal that is
both challenging and realistic. If his year-over-year PBT is greater than that of another
HCC division, then he will receive the 40% bonus. Furthermore, establishing competition
between the four divisions will significantly increase their motivation to perform beyond
normal capacity. Assuming that division managers are sensible and responsible enough to
not pad their budgets, this new system will incentivize mangers to work hard towards
ambitious goals and eliminate their fear associated with losing their jobs. Lastly, in the
worst scenario that the system does not work as well as intended, management can adjust
its policies after its beta-testing year.
Conclusion
In sum, HCC will be able to achieve its corporate targets and experience sustainable
growth if these recommendations of (1) communicating financial data to division

COMM414 Case 2: HCC

Chloe Chan 10089132

Due: October 20, 2015

personnel and (2) re-assessing bottom-up budgeting method are implemented

immediately. Not only are divisions more likely to meet their own targets, corporate and
division managers will receive their bonus payments on time and foster trust and
transparency within HCCs organizational culture.