(I NEED A SUMMARY IN SIMPLER TERMS LIKE THE KEY LESSON I COULD LEAND FROM THE READING BECAUSE I AM NOT SURE HOW TO PLAY AND/ OPERATE THIS GAME.)
Compensation, Training, and Facilities Decisions
This page contains 4 decision entry fields for compensating workers engaged in assembling action cameras and 4 decision entry fields for compensating workers engaged in assembling drones. The compensation decisions are the same for both types of workers: (1) how much to raise/lower the base pay of PAT members, (2) whether and by how much to change each PAT’s assembly quality incentive payment per unit assembled, (3) whether and by how much to alter the annual bonus for perfect attendance, (4) whether and by how much to raise/lower payments for fringe benefits. It is up to you whether to establish identical or different compensation packages for the two types of workers.
PAT Productivity. Just under the compensation-related decisions is a field for entering the amount management wishes to spend for training PAT members and improving PAT productivity. The productivity of each four-person PAT (how many units they can assemble in a given year) is influenced by 8 factors:
• Annual base wage increases—Annual increases in base pay of 2% or more lead to higher levels of productivity, chiefly because higher annual base wages help attract and retain workers with better skills and work habits and because higher base wages make workers feel better about their jobs and enable higher standards of living for them and their families. The maximum annual base pay increase is 10%. Cuts in base pay are allowed, up to a maximum of 15% in any one year; as might be expected, base pay reductions act to reduce PAT productivity. Small pay cuts do not entail a “big” drop in productivity but cuts of 5-15% will have a major negative impact.
• The assembly quality incentive—Experience indicates that bigger assembly quality incentive payments per unit increase productivity and reduce warranty claims. PATs have responsibility for fully testing the functioning of each action camera/UAV drone assembled and correcting any performance problems, including replacing malfunctioning components— the costs of replacing defective or malfunctioning parts/components are borne by suppliers. Prior management instituted the practice of paying each PAT an assembly quality incentive for each unit assembled, the thesis being that such incentives spurred PAT members to propose ways to cut assembly and testing times while still accurately assembling and thoroughly testing each camera or drone after assembly. Thus far, PAT members in the assembly facilities have taken pride in coming up with better and more efficient procedures that help reduce warranty claims and boost productivity. In Year 5, the incentive payments were $2.40 per camera per PAT and $4.80 per drone per PAT; these payments are divided equally among all PAT members.
• Attendance bonus—Absenteeism on the part of PAT members has a strong negative impact on the functioning and performance of the remaining team members. When team members fail to show up for work a team’s assembly procedures are disrupted; and substitutes must be assigned to fill-in for the person(s) absent or else the team must try to assemble units as best it can. To discourage absenteeism, prior management instituted the practice of paying an $800 year-end bonus to each PAT member with a record of perfect attendance (defined as working 2000 hours per year—50 weeks at 40 hours per week, with 2 weeks off for holidays and personal leave); missing as much as 1⁄2 day during a 2000-hour work year constituted disqualification for the bonus. Prior management believed the attendance bonus was successful in keeping absenteeism at a tolerable minimum, thereby enabling most PATs to operate at full-strength and assemble at least a reasonable number of cameras/drones each shift. However, you have the authority to discontinue the practice of paying a bonus for perfect attendance, to continue the program as is, or to raise the size of the bonus periodically as you see fit. It is up to you to determine whether diverting the $800 bonus per PAT member to other types of compensation (such as bigger incentives or higher base pay or bigger fringe benefits) could lead to even better PAT productivity.
• Fringe benefits package—PAT members and other company personnel view a generous company-paid fringe benefits package (health insurance, disability insurance, term life insurance, and retirement plans) as an important element of a “good job” because thecomponents of fringe benefit packages add to an employees’ overall well-being.
- Total compensation—How well your company’s PAT members are being compensated relative to rival companies with regard to base pay, assembly quality incentives, the perfect attendance bonus, and fringe benefit packages is a major factor in the company’s ability to attract/retain better-caliber, more productive employees. The best, most productive workers are inclined to leave jobs at lower-paying companies for jobs at higher-paying companies. Likewise, job seekers that exhibit motivation, pride of workmanship, good work habits, and aptitudes for teamwork are drawn to work for those companies having the best overall compensation package. Thus, PAT productivity tends to be higher at the companies with the highest total compensation packages per PAT member.
- Best Practices / productivity improvement budget—The productivity of PAT s is enhanced by training PAT members in better assembly techniques, post-assembly product testing, ways to reduce warranty claims, and overall productivity improvement. You have the authority to raise/lower annual spending per PAT for such training. While spending greater amounts per PAT increases productivity, the benefits from greater annual training expenditures per PAT are subject to diminishing marginal returns (that is, the benefits become smaller and smaller, eventually reaching a point where the added costs outweigh the added benefits). A company can always reduce annual training expenditures per PAT without losing the previous productivity gains.
- Product R&D expenditures (cumulative)—A portion of R&D expenditures is always devoted to improving the designs of all camera/drone models in ways that reduce the amount of time it takes PATs to assemble and test them, thus increasing the annual productivity of PATs.
- Number of models—Increasing the number of models will reduce PAT productivity, due to lower PAT proficiency in assembling more models and increased model change-over time. Reducing the number of models boosts productivity because PATs have fewer assembly and post-assembly product testing procedures to master and less model change-over time.
- The total compensation of camera PATs versus drone PATs—A small difference between the compensation packages of a company’s camera and drone PATs will be tolerated by PAT members. However, a significant disparity in the compensation packages of camera and drone PATs can cause dissatisfaction among the PAT members receiving the smaller compensation package, thus negatively affecting productivity. In Year 5, the compensation packages of camera and drone PATs were identical.
- At the end of year 5, the productivity of PATs assembling action cameras was 3,000 units annually. There is reason to believe that over the next several years the productivity of camera PATs can be increased to 3,500 to 4,000 cameras annually. Productivity could go even higher, if managers aggressively pursue productivity gains via attractive compensation, additional training, and robot- assisted assembly techniques.
- At the end of year 5, the productivity of PATs assembling drones was 1,500 units annually (drone assembly is more complicated and involves assembling the built-in action camera, as well as the drone itself; moreover, thoroughly flight testing all the performance features of a UAV drone is considerably more time-consuming). The productivity of drone assembly PATs could rise to perhaps 2,000 units annually, if company managers are willing to invest in attractive compensation packages, additional training, robot-assisted assembly methods, and more time-efficient flight-testing (via product R&D).
- Assembly Capacity, Facilities Expansion, and Workstation Additions. The remainder of this decision page is devoted to decision entries and on-screen calculations that enable you to (1) fill growing buyer demand for your company’s cameras/drones by having PATs work overtime—the maximum number of cameras/drones that can be assembled at overtime is 20% of annual PAT productivity (the number of units a PAT assembles each year), (2) add additional workstations as may be needed to fill incoming orders for cameras/drones during the current year, (3) initiate projects to expand the size of the assembly facility for cameras and/or drones whenever additional workstation space is needed, and (4) order a robotics upgrade for all existing camera and/or drone workstations that enables the size of PATs to be reduced from 4 persons to 3 persons and that also.
- Your instructor has placed weighted the relative importance of the five scoring variables: Earnings Per Share (EPS), Return on Average Equity (ROE), Stock Price, Credit Rating, and Image Rating. These weights translate into some number of points for each of the scoring variable, with the sum of the points adding to 100. Your company’s performance on the five scoring variables is measured using two different scoring standards:
- 1. The Investor Expectations (I.E.) Standard. This scoring standard involves calculating an annual “Investor Expectation Score” based on your company’s success in meeting or beating the performance targets for EPS, ROE, stock price, credit rating, and image rating. There is also a Game-to-Date Investor Expectation Score that measures your company’s success in achieving or exceeding the five expected performance targets over all years of the exercise completed so far. Meeting each expected performance target is worth some percentage of 100 points, as determined by your instructor. For example, if the scoring weight for EPS is 20% or 20 points, meeting the EPS target earns a score of 20 on the EPS scoring variable. Beating a target results in a point award of 0.5% for each 1% the annual target is exceeded (up to a maximum of 20%). So, if achieving the EPS target is worth 20 points, a company can earn a score of 24 points if it exceeds the annual EPS target by 40% or more. Failure to achieve a target results in a score equal to a percentage of that target’s point total (based on its weight out of 100 points). If your company earns an EPS of $2.00 at a time when the EPS target is $4.00 and achieving the investor-expected ROE target is worth 20 points, then your company’s EPS score would be 10 points (50% of the 20 points awarded for meeting the EPS target). Exactly meeting each of the 5 performance targets results in an Investor Expectation Score of 100. With potential point awards of up to 20% for exceeding each performance target by 40% or more, it is possible to earn an Investor Expectation Score as high as 120.
- 2. The Best-In-Industry (B-I-I) Standard. This scoring standard is based on how your company’s performance compares (1) to the industry’s best performing company on EPS, ROE, Stock Price, and Image Rating and (2) to the ultimate Credit Rating of A+. After each decision round, company performances on EPS, ROE, Stock Price, and Image Rating are arrayed from high to low. The Best-In-Industry performer on each of these 4 scoring variables earns a perfect score (the full number of points for that measure as determined by the weights chosen by your instructor)—provided the industry leader’s performance equals or exceeds the investor-expected performance target established by the company’s Boardof Directors. Each remaining company earns a fraction of the points earned by the Best-In- Industry performer that is equal to its performance divided by the performance of the industry-leading company. For instance, if ROE is given a weight of 20 points, an industry- leading ROE performance of 25% (that is above the investor-expected ROE) gets a score of 20 points and a company with an ROE of 20% (which is 80% as good as the industryleader’s ROE) gets a score of 16 points (80% of 20 points). Likewise, if EPS is given an instructor-assigned weight of 20 points, a company with an industry-leading EPS performance of $4.00 gets a score of 20 points and a company with an EPS of $3.00 (which is 75% as good as the industry leader’s EPS) gets a score of 15 points (75% of 20 points).
- The procedure for assigning best-in-industry scores for credit rating is a bit different. Each credit rating from A+ to C− carries a certain number of points that scales down from the maximum for an A+ credit rating to 1 point for a C− rating.
- Each company’s combined point total on the five scoring variables is its score for the Best- In-Industry standard. Your company will receive an annual Best-In-Industry score as well as a B-I-I score for all years completed. In order to receive a score of 100, a company must (1) be the best-in-industry performer on EPS, ROE, stock price, and image rating, (2) achieve the investor-expected targets for EPS, ROE, stock price appreciation, and image rating set by the company’s Board of Directors, and (3) have an A+ credit rating.