It has been suggested that optimal bonus schemes for profit center managers promise significant rewards for the achievement of challenging targets in areas they can influence.

It has been suggested that optimal bonus schemes for profit center managers promise significant rewards for the achievement of challenging targets in areas they can influence. These schemes balance short-term pressure with incentives to maintain a long-term focus and protect managers from the distorting effects of uncontrollable factors. It has also been suggested that many bonus schemes have additional features with different motivational effects. The following are possible features of bonus schemes.

• Limiting the range of performance within which rewards are linked to results, in particular ignoring losses and limiting maximum payments

• Linking incentive payments wholly or partly to the profit of the organization as a whole Required

a) Explain why bonus schemes might include these features 10 Marks

b) Discuss the benefits and drawbacks of incorporating these features into bonus schemes. 10 Marks

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