2. Evaluate the budgeting, performance measurement, and incentive systems used at Kooistra Autogroep. What changes would you recommend, if any?
The CEO introduced a formal annual budgeting process. The main target of this budgeting system was to determine the net profit targets for the year. The net profit target is the company’s revenue minus the controllable expenses. These targets were for the company’s departments and should help with decentralization of the company. The budgeting process was ment to be bottom-up. This means that the managers of the departments could prepare the budgets and the CEO and CFO then reviewed these budgets. Most managers are unexperienced with budgeting and the review of the CFO and CEO would lead to a discussion so that the managers would get more and more confident with budgeting.
This would help the decentralization. The car industry is an industry, which is really dependable on the economic conditions. So the budget made at the beginning of the year is not always a feasible budget. Reviewing the budget a few times a year could change this. The CEO helps out sometimes when the budget target probably is not going to be made. But the managers cannot depend on this. Performance measurement:
The new performance measurement now includes not only financial information but also nonfinancial information. The performance measurement system is used to communicate the company’s objectives to the personnel. The objects that are measured in the performance are the most important objectives. The performance measurements provide the managers with the information to do their job properly and it provides feedback to the top management about the performance of the managers. The company uses ‘Balanced Scorecard’ on a weekly basis. The balanced scorecard provides key metrics for the manager’s list of targets and it provides an indication of the progress towards budget target.
Besides the balanced scorecard the managers get also a monthly report, which is more detailed about the company’s operations. Recommendation: the balanced scorecard is used to measure the manager’s performance for different factors. These factors are financial and nonfinancial. But it is not very clear what the targets are. Every dealership has to have a return of sales of 2% but there is not given any further financial of nonfinancial performance indicator. Incentive system:
A major change for the Kooistra Autogroep was the expansion of the pay-for performance system. The pay-for performance system already existed in the company but only for a few sales people. But this is limited and not fully covered for all the sales people. Because of the already excising contract and rejecting the pay-for performance bonus system not every sales person is accounted with pay for performance. This could lead to disorder and unfair situation. Because when its not going well with the economy and so with the dealerships sales the sales people with the pay for performance are accounted for the less sales. But the sales people with the normal salary contract are not accounted for the fewer sales.
Also in normal situations the sales people with the pay-for performance system will try to do their best because their salary depends on their performance. While for the sales people with the normal contracts its not as much depended on their performance. For the management team the pay-for performance does its work for every member. So it’s fairer. The managers could also receive a bonus reduction when some criteria were not met. But it’s said that this would be a very subjective decision and it was not really clear on what criteria it depends. This should be changed and made clear on what criteria or totally deleted. Note: It is said that no bonus will be paid for below or above target performance, which is strange. Because as a company u would want to have above target performance.
Further more the pay for performance system is a relatively unknown system in Dutch companies and the personnel of the company are not really pleased with this system. So it would be point to think about for the company to introduce the system quietly. This could be done for example by starting with a tradional bonus system and next to that also a pay for performance system. So using both systems for a few years and then switch to only a pay-for performance system.