Rko Warner

January 17, 2011

MG645 Management of Human Resources

RKO WARNER VIDEO, INC. INCENTIVE COMPENSATION PLAN

1. WHAT IS YOUR ANALYSIS OF THE INCENTIVE COMPENSATION PLAN AT RKO?

RKO Warner Video is growing and CEO Michael Landes wants to ensure his vision is being implemented down the chain of command. To ensure this happens Michael Landes hired a consulting firm to work with RKO Warner Video President, Steven Berns, and Vice President of Operations, Ken Molnar, regarding the implementation of an incentive compensation package.

Berns firmly believes subjective performance reviews conducted by his District Managers of his store managers is the way to go. Subjective measures such as store cleanliness, opening on time, getting returned cassettes back on the racks, keeping proper inventory levels, and maintaining short checkout times during busy periods are examples of what Berns wants to measure since they are very concerned with the compliance issue.

On the other hand, the consultant favors a completely objective performance measure based on revenues from video cassette sales and rentals. The consultant believes Berns will get all he expects subjectively by incentivizing based on revenues. Berns decides to go with the consultant's recommendation and implements the objective incentive plan over a two quarter trial period. The bonus structure implemented is highlighted below.

If actual quarterly sales > 95% of the quarterly sales target and

Actual quarterly rentals > 95% of the quarterly rental target then:

Total quarterly bonus = 0.25 x Total annual bonus base +

0.06 x (Actual Rentals – Target Rentals) +

0.02 x (Actual Sales – Target Sales)

Between 95% & 100% of target bonus reduced by 6% of rental shortfall and 2% of sales shortfall

No bonus for falling below 95% of target in either sales or rental revenue.

My analysis indicates that RKO Warner Video is a very centralized organization located in a relatively compact area. As the...