The proposed bonus system seems to be better than the currently established bonus system overall. However, it does have its flaws. One major flaw in the proposed bonus system is that it is rooted in the budgeted profits, assets, and economic profit objective. Basically, managers in the company have their bonuses based on forecasts of what their division should earn in profits and use in total assets...
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Basically, managers in the company have their bonuses based on forecasts of what their division should earn in profits and use in total assets. While statistic forecasting is a thorough process, it is still an estimate and is usually never dead-on accurate. Therefore, since the economic profit objective is based purely on budgeted numbers, and is then used with actual economic profit to determine the difference, if the forecasted numbers are wrong (or something like an unforeseeable occurrence like a natural disaster were to occur), the bonus system would fail...