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TitleHCC Industries
TagsSelf-Improvement Motivation Evaluation Employment Top Down And Bottom Up Design
File Size103.6 KB
Total Pages8
Document Text Contents
Page 4

COMM414 Case 2: HCC Chloe Chan 10089132 Due: October 20, 2015

While it is true that the HCC competed in two distinct markets (connector and micro-
electronic packages) and PBT goals were expected to differ across divisions, there was
huge discrepancy in budget setting philosophy between division managers and corporate
staff. Management questioned the division mangers’ abilities to set budgets because most
of them had engineering background but with no business training. Management also
failed to communicate clearly to division managers about their expectations, resulting in
proposed budgets that were either too conservative or too aggressive. Between the CFO,
COO, and division management, there was inconsistency in felt probability of budget
achievement (e.g. With respect to Sealtron’s target set in March 1987: division manager
had 60%; CFO had 90%; COO had 100%).

Issue #3: Lack of Transparency
HCC lacked transparency between organizational levels, which fostered distrust and
frustration among employees. Particularly, employees that were eligible for the bonus
plan did not understand their bonus potential or the bases on which the bonus awards
were made. This was a result of division-level managers keeping financial results private,
as they feared that their subordinates would leak information to competitors. Chris
Bateman, the CFO, indicated that management would involve general managers in long-
term planning (over two years) discussions only occasionally. Without any
communication of HCC’s long-term strategies, it is unsurprising that management viewed
Hermetite’s general manager, Alan Wong, as “naïve” when they were merely unaware
that they must meet certain expectations from upper management.

Issue Analysis

Issue #1: Missing Targets
The old stretch target system required division managers to assess their actual
performance against their targets. This was an advantage as it presented employees the
opportunity to redeem themselves if goals were not met. Managers were satisfied with the
fact that their COO was lenient with explanations on missing monthly targets. In
addition, they only needed to achieve 60% of the budget in order to enjoy bonus
payments. For the most part, the stretch budgeting concept was well received amongst
division management.

Conversely, because the stretch budget targets were widely known across the organization
to be too optimistic, division managers fostered a culture of being “OK to miss budget”.
It was clear that they did not have the motivation to truly meet stretch targets because
they would still be rewarded as long as they met 60% of the budget at a minimum.
Furthermore some divisions were able to achieve targets while others did not. This
caused the corporate staff a great deal of stress and frustration. While Hermetic Seal and
Glasseal divisions were able to achieve their own stretch targets, HCC as a whole had not
been able to meet any high-level organizational objectives.

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COMM414 Case 2: HCC Chloe Chan 10089132 Due: October 20, 2015

Lou Palamara (Sealtron) vs. Management
Tension was created when Sealtron’s division manager, Lou Palamara, tried to justify his
$900,000 PBT target to the CEO, who demanded a PBT goal of $1 million. Not only was
the back-and-forth process cumbersome, Palamara felt discouraged that the unrealistic
target would cost him his job. Next, Sealtron missed its targets during the 1987 fiscal year
and employees within the division did not receive bonuses. This raised huge concern
since other divisions were rewarded as long as they met 60% of the budget goal.
Palamara believed that, without proper compensation, attracting and retaining talent
would become problematic. Here, his priority was not to meet PBT target, rather it was
to hire talent because his motivation stemmed from improving HCC’s long-term
profitability.

Issue #3: Lack of Transparency

It is logical to limit financial information access to only to those who are involved in the
budget setting process – namely corporate management and division managers. Sharing
too much information with division personnel might overwhelm them, as financial
statements are difficult to comprehend. At the same time, HCC is a publically traded
company, thus its financial information is required to be accessible by people inside and
outside the organization.

Management failed to communicate its (1) long term strategy to division managers and
(2) intent of increasing PBT goals for Glasseal and Sealtron. The absence of clear,
consistent communication contributed to managers’ inability to meet management’s
expectations. For instance, Lou Palamara assumed that it was his job to make a company
long-term investment by hiring talent. However the CFO believed that the organization
“could not afford any fat”. Another example is where Alan Wong aimed for optimistic
targets; he assumed that HCC wanted his division to become a profitable operation. But
the COO thought he was naïve. This caused tension and awkwardness between division
managers and corporate staff.

Another concern was that the evaluation criteria were too subjective, according to
division managers. On the other hand, a subjective performance evaluation was more
efficient for upper management to process.

Recommendations

Firstly, it is recommended that division personnel are provided with very high-level
updates on quarterly performances. Have division managers perform the following steps
four times a year:

1. Extract key information from financial statements, then summarize data
2. Present data in a friendly, easy-to-understand format in front of division personnel

(those who qualify for bonus plans)
3. Outline how their bonuses are impacted by that particular quarter’s performance

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COMM414 Case 2: HCC Chloe Chan 10089132 Due: October 20, 2015

Should personnel request to view the company’s income statement for cross-referencing,
make it a requirement for them to sign appropriate nondisclosure agreements and
performance contracts. This will ensure all parties are legally protected. It is imperative
that these forms are signed before management distributes the income statement to the
individuals who made the request. By doing so, HCC will improve its transparency
across levels and instill trust in its corporate culture.

Secondly, HCC should stay true to bottom-up budgeting method and allow division
managers to set their target goals. Since budget of 1988 have already been approved, no
adjustments can be made. However, Andy Goldfarb should immediately distribute
company-wide letters indicating the following:

- Division managers have absolute control over 1989 quarter’s budget; they will set
their own target goals in all seven performance areas (PBT, Bookings, Shipments,
Returns, Rework Aging, Efficiency, Delinquencies)

- Corporate management may ONLY act as a guidance during the budget planning
process that will take place from 1988 December to 1989 mid-March. They can
provide advice, upon division managers’ requests; but their opinions will not
impact general managers’ final decisions in any way

- Consequently, the budget negotiation process will be removed as division
managers will be fully responsible for setting their own targets

- To discourage division managers from setting excessively easy targets, the
average PBT results from 1988 Q1 to Q4 will serve as the new MPS for 1989

- The division that shows the highest growth (1989 MPS vs. 1989 Target) by the
end of 1989 fiscal year is subjected to receiving 40% bonus of base salary within
the first quarter of 1990

- Those who do not meet the target will not be penalized
- This budgeting and incentive concept is effective from 1988 December to 1990

November (one year)

Rather than penalizing managers for not meeting targets, Andy should reward the
manager who can lead the highest growth. For example, if Sealtron division’s actual PBT
is $195,000 in 1988, it will become Lou’s MPS in 1989. He must establish a goal that is
both challenging and realistic. If his year-over-year PBT is greater than that of another
HCC division, then he will receive the 40% bonus. Furthermore, establishing competition
between the four divisions will significantly increase their motivation to perform beyond
normal capacity. Assuming that division managers are sensible and responsible enough to
not pad their budgets, this new system will incentivize mangers to work hard towards
ambitious goals and eliminate their fear associated with losing their jobs. Lastly, in the
worst scenario that the system does not work as well as intended, management can adjust
its policies after its beta-testing year.

Conclusion
In sum, HCC will be able to achieve its corporate targets and experience sustainable
growth if these recommendations of (1) communicating financial data to division

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