Reference no: EM132954608

Wirest manufactures and sells a diverse range of electrical equipment to wholesalers located across Europe. Their administrative headquarters (including central management) is located in Ireland, while production and sales activity occur across a number of internationally based divisional profit centres. Each of these profit centres serve different geographical market segments of varying sizes. Sally Ward, who owns 100% equity and is the Manager Director, founded Wirest fifteen years ago. The Board of Directors comprises of Sally and her son Tim. Sally chairs the board.

• Return on Investment (ROI) is the preferred measure for evaluating divisional performance within Wirest and in this regard each division has been mandated by senior management to achieve a minimum 12% return per annum. For divisions that meet this minimum ROI threshold, the divisional management team are rewarded equally within an annual bonus payment linked to the total divisional profitability for the year in question. However, at odds with this policy, the entire management team of Magnal Division were unanimously awarded a discretionary annual bonus payment in 2018 and 2019, despite the fact that their division did not meet the pre-determined 12% target rate of return in either year. The logic underpinning this decision was that as the senior management team at Wriest believe that the Magnal Division could potentially become the firms most profitable division in the future, they were eager to incentivise the incumbent divisional management team for their non-attainment of the target rate of return, focused on the highly competitive nature of the market in which they compete.

• Although all the Wirest's Divisions (with the exception of Magnal) have met their annual 12% target over the past few years, Wirest has not achieve its primary strategic objective of increased market share. Consequently at a recent meeting of Wirest's senior management team, it was suggested that the basis of future divisional performance evaluation within Wirest should change to an equally weighted combination of both ROI and Residual Income (RI).

Wirest is currently preparing to apply for a listing on the Irish Stock Exchange. The purpose of seeking this listing is to allow Sally to see 40% of her equity. She wishes to diversify her assets but doesn't want to lose control of Wirest.

REQUIRED

Problem 1: Identify and discuss three (3) weaknesses of the current system of divisional performance evaluation within Wirest.

Problem 2: Discuss two (2) of the main weaknesses of Wirest's reward system.

Problem 3: Discuss two (2) of the main weaknesses of the new proposed performance evaluation. In your discussion provide a suggestion on how to improve each weakness.