Choosing Bonus Plans Mobile Business Incorporated (MBI)is a worldwide manufacturing company that specializes in high technology products for the aerospace,automotive and plastics industries.The state-of-the-art technology and business innovation have been key to MBI's success over the last ten years.After a meeting of the board of directors,there was some feeling that the company was moving away from its goal of striving to maintain and expand its global position through innovative management teams.One area of concern was with the company's bonus compensation package.The company's current bonus plan focuses on giving reward based on the utilization of capital within the company,i.e.management of inventory,collection of receivables and use of physical assets.Even with such a state-of-the-art bonus plan,the board of directors is concerned with the short-term focus of the compensation package.MBI's basis in current financial standards suggests that the future period consequences of managerial actions will not be reflected when presenting bonus compensation.Required: Help MBI solve the problem of basing bonuses on short-term decisions.Develop a bonus package that takes into consideration the long-term financial position of MBI.

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Feedback: For companies with substantial growth opportunities or long product life cycles it would seem that bonus plans based on short-term decisions may not adequately reflect long-term consequences of managerial decisions.MBI could consider a stock option plan that initially sets the exercise price of the option at the current share price,but then periodically increases the exercise price by a growth rate consistent with the company's cost of capital.Then the bonus plan would have implemented long-term financial positions before allowing stock options to be paid off.MBI may want to consider granting stock options where the exercise price is adjusted with the appreciation of an industry index.This will allow MBI to reward executives for an increase in the value of their stock relative to that of companies facing similar risks.MBI could also establish a bonus account system.Under this system the executives do not receive the full amount of the bonus earned in a particular year.A portion of the bonus is placed in an account and is only paid out to the executives in future periods if they meet specified performance criteria in the future.This would prohibit executives from increasing current performance measures at the expense of damaging future performance.

Choosing Bonus Plans Mobile Business Incorporated (MBI)is a Worldwide Manufacturing