Rko Warner Video Inc.- Incentive Compensation Plan

Harvard Business School

9-190-067

Rev. June 29, 1993

RKO Warner Video, Inc.

Incentive Compensation Plan

Introduction

On a cold morning in mid-January 1989, Steve Berns and Ken Molnar sat in a conference

room at RKO Warner Video headquarters in Manhattan analyzing fourth quarter 1988 results and

evaluating the company’s incentive compensation plan, which had been in effect for the past two

quarters. Berns, RKO’s president, and Molnar, the company’s vice president of Operations, were

scheduled to meet with Michael Landes, the chairman and owner of RKO, at the end of the week to

review the video chain’s expansion plans for 1989.

Berns had been with the company, previously known as Video Shack, since its inception in

1979 when he joined as a salesperson. When Landes acquired the company in November 1986, Berns

had risen to the position of president. Molnar had worked for Landes for six years at RKO Century

Warner Theaters, which Landes had sold in 1986. While both men were pleased with the 1988 results

and confident of their plans for the chain’s future expansion, they were uneasy about the costs and

the results of the incentive program that had been initiated on Landes’s suggestion six months

previously.

RKO’s 24 stores were concentrated in the New York City area and sold or rented prerecorded

videocassettes (PRCs) to consumers. The Broadway store, the first and largest RKO store, and the

largest PRC retail outlet in the world, epitomized the chain’s strategy. It had an enormous inventory

of PRCs representing a broad range of titles, presented in an attractive and carefully designed

environment. After a brief period of consolidation following the acquisition, computer equipment

was installed, the stores were redecorated to Landes’s high standards, and RKO embarked on a store

opening spree designed to consolidate its dominant position in the New York market. Seventeen new

stores had been opened in less than two years, with fifteen...