Bmg Study Case

INTRODUCTION AND BACKGROUND

BMG MAIN ISSUES

BMG International has critical issues within this case. In May 1993, the BMG International executive committee was at a meeting in Florida. There, they realized that the company would receive unexpected savings of $20 million in March. This was due to a restructured manufacturing deal in Europe, which ended up reducing the cost of manufacturing.

In general, reduced costs always seem good; however, the issue with this is that the committee needed to decide if they should change the business targets to reflect the new manufacturing price. If they were to change the targets, they would affect the managing director’s bonuses. The managing directors’ bonuses are dependent on their division meeting their target, a target that was decided in March.

Rudi Gassner believed the managing directors’ bonuses should reflect the savings from the reduced manufacturing cost. He believed that the MDs will become complacent if targets were unchanged. Gassner has an interesting perspective on his option, “I want to maintain the challenge of an aggressive bonus target, I want the managing directors to be held accountable for the savings. I want them to realize that it isn’t just a Christmas gift.” Gassner emphasized that bonuses should be merit-based, not merely given. The regional directors at the meetings did not want to change the MDs’ bonuses because they did not want to upset the managing directors. The managing directors and regional directors think it’s not fair to change, because targets have never been changed in the face of negative issues, why change because of a positive issue?

An interesting fact is that the Central Europe regional director, Arnold Bahlman, negotiated the deal with Sonopress. John Preston is the regional director of England and Ireland. Preston claims he could of gotten a better deal with a UK manufacturer, but he is now contractually obligated to Sonopress. Preston is the one who,...