Podcast
Questions and Answers
What main issue arose from the sales managers' 'low-balling' of forecasts?
What main issue arose from the sales managers' 'low-balling' of forecasts?
- It caused production schedules to be disrupted. (correct)
- It led to increased employee satisfaction.
- It enhanced the accuracy of actual sales predictions.
- It improved the relationship between sales and management.
How were sales managers rewarded under the new incentive model?
How were sales managers rewarded under the new incentive model?
- With bonuses for accurate sales forecasts. (correct)
- With raises for consistent high performance.
- With penalties for failing to meet any sales targets.
- With bonuses for achieving low sales forecasts.
What was a consequence of the sales managers forecasting achievable sales figures?
What was a consequence of the sales managers forecasting achievable sales figures?
- Increased hiring and staffing flexibility.
- Disincentives to exceed budget targets. (correct)
- Improved company morale.
- More accurate production plans.
Why did management struggle to understand the appropriate forecast levels?
Why did management struggle to understand the appropriate forecast levels?
What was the implication of the low estimates provided by the sales managers?
What was the implication of the low estimates provided by the sales managers?
What was the main goal when trying to incentivize accurate forecasting?
What was the main goal when trying to incentivize accurate forecasting?
In which area did management have limited visibility due to the sales managers' forecasts?
In which area did management have limited visibility due to the sales managers' forecasts?
What was the flaw in the previous bonus structure for the sales managers?
What was the flaw in the previous bonus structure for the sales managers?
What unintended consequence arose from rewarding managers for closeness to their forecasts?
What unintended consequence arose from rewarding managers for closeness to their forecasts?
How has the sales forecasting process contributed to issues in operational planning?
How has the sales forecasting process contributed to issues in operational planning?
What is the structure of the overall bonus plan when actual sales meet or exceed the forecast?
What is the structure of the overall bonus plan when actual sales meet or exceed the forecast?
Which of the following best describes the relationship among the coefficients b1, b2, and b3?
Which of the following best describes the relationship among the coefficients b1, b2, and b3?
Why might the incentive plan encourage employees to forecast high sales?
Why might the incentive plan encourage employees to forecast high sales?
What is the consequence of actual sales being lower than forecasted sales based on the bonus structure?
What is the consequence of actual sales being lower than forecasted sales based on the bonus structure?
What does the incentive plan imply for a manager whose forecast equals the actual sales?
What does the incentive plan imply for a manager whose forecast equals the actual sales?
Which strategy is suggested for the values of b1 and b2 according to management's intentions?
Which strategy is suggested for the values of b1 and b2 according to management's intentions?
How does the bonus system impact employee behavior towards forecast accuracy?
How does the bonus system impact employee behavior towards forecast accuracy?
What change in sales results negatively affects the bonus according to the outlined plan?
What change in sales results negatively affects the bonus according to the outlined plan?
What is the primary purpose of changing the management's incentives regarding sales forecasts?
What is the primary purpose of changing the management's incentives regarding sales forecasts?
What is the consequence of managers delaying sales orders to avoid exceeding forecasts?
What is the consequence of managers delaying sales orders to avoid exceeding forecasts?
What is the formula used for calculating the bonus based on forecasted sales?
What is the formula used for calculating the bonus based on forecasted sales?
What happens when actual sales are less than forecasted sales according to the incentive plan?
What happens when actual sales are less than forecasted sales according to the incentive plan?
Which component of the incentive plan encourages managers to increase actual sales beyond forecasts?
Which component of the incentive plan encourages managers to increase actual sales beyond forecasts?
What type of behavior may the incentive plan provoke in sales managers in regards to setting sales forecasts?
What type of behavior may the incentive plan provoke in sales managers in regards to setting sales forecasts?
What is the relationship between bonuses and forecasted sales in the incentive plan?
What is the relationship between bonuses and forecasted sales in the incentive plan?
When should a sales manager expect a penalty under the incentive plan?
When should a sales manager expect a penalty under the incentive plan?
How does the incentive plan impact the willingness of sales managers to set ambitious sales goals?
How does the incentive plan impact the willingness of sales managers to set ambitious sales goals?
What is the second component of the incentive plan focused on?
What is the second component of the incentive plan focused on?
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Study Notes
Incentive Model for Accurate Reporting
- Problem Statement: Companies often struggle to incentivize employees to provide accurate information while also achieving high performance.
- Case Study: A company uses sales forecasts from district sales managers to create budgets and evaluate performance.
- Initial Approach: The company initially offered bonuses for exceeding budgets. This resulted in sales managers "low-balling" their forecasts to ensure bonuses.
- Revised Approach: The company shifted to rewarding managers for accurate forecasts. However, this strategy led to managers intentionally limiting sales to match their forecasts, creating disincentives to exceed targets.
- Incentive Plan Components: The text proposes a three-component incentive plan to address both accurate forecasting and achieving high sales:
- Component 1 (Positive Incentive for Forecasting): Reward is based on forecasted sales, encouraging sales managers to forecast high numbers.
- Component 2 (Incentive for Exceeding Forecast): Additional reward is provided when sales exceed the forecast.
- Component 3 (Penalty for Shortfalls): Managers are penalized when actual sales fall below the forecast.
- Overall Plan: The plan combines the three components, rewarding accurate forecasting and high sales simultaneously.
- Rule of Thumb: The penalty for shortfalls (b3) should be significantly higher than both the reward for forecasting (b1) and exceeding the forecast (b2). This incentivizes managers to strive for accurate forecasts and high performance.
- Summary: The incentive model aims to provide employees with both rewards for accurate forecasts and sales output. This method is adaptable to different types of forecasting, such as production levels, costs, and productivity.
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