European Delicatessen Products Inc. - Management Compensation Plan

European Delicatessen Products Inc.

Instructions

1. Read this case. Think about:

i. What Mr. Keskkula’s goal is in considering the new compensation plan.

ii. How the consultant’s recommendation for the purchasing department matches this goal:

• Why might the recommended plan help Keskkula reach the company’s goals?
• Could there be any unintended side-effects that would hurt the company?
• Hint: Consider what the company’s strengths are, and how changing the plan could reinforce or lessen these strengths.
• Whether EDP should implement the recommendation, or not.

2. Go to the discussion board and post an answer to the question posted there.

This assignment is worth 5 marks and is due by end of day Thursday, November 18th. I have included a rubric showing how I will evaluate your posts.

The case

Hannes Keskkula, the president of European Delicatessen Products Inc. (EDP), was considering a consultant’s report on management compensation. The growth of EDP had led him to ask the consultant to review the company’s operations and management compensation plans.

He had started EDP six years ago with a small loan from his parents, believing that there was an untapped demand in Canada for eastern European food products. The growth of EDP had justified his confidence: starting with just two employees and a small warehouse in Okotoks, Alta., EDP had grown to a $100-million-a-year business employing 300 people across Canada; before-tax profits in 2019 were $26 million.

EDP had three main operational departments: purchasing, warehousing and distribution, and sales. Every six months, EDP’s management team met to discuss plans for the upcoming six months. The sales team was responsible for preparing a sales budget based on estimates of demand for various products; based on this budget, the purchasing team was responsible for preparing a purchasing plan based on expected market prices. EDP’s Executive Committee, which included Keskkula, the vice-president of finance, the vice-president of sales, and the vice-president of purchasing, then reviewed and approved the combined sales and purchasing plan.

The purchasing team were acknowledged experts at finding supply sources and at negotiating favourable prices that provided EDP with a well-priced supply of goods while maintaining excellent relationships with suppliers; these relationships were useful when EDP was faced with unexpectedly high demand or when market or production issues led to shortages.

EDP had always paid each of its managers a salary plus a bonus based on the company’s profitability. The consultant, however, had pointed out to Keskkula that compensation should match responsibility, and that many factors affecting profitability were beyond any one manager’s control. The consultant had recommended, for example, that compensation for the managers in the purchasing department be based on variances in cost from the purchasing plan, giving them an incentive to source product at the lowest possible price.
Keskkula needed to decide whether to replace the current profit-based compensation plan with the new model.

European Delicatessen Products -Discussion Board - Marking rubric (5 marks)

Excellent (4.5-5):

The post addresses the issue clearly and completely:

• States what the goals are
• Shows how the recommended change might help meet the goals
• Outlines the unintended side-effects the change might have
• States how the change fits with the company’s key strengths
• Gives a clear recommendation

The writing style is

• Clear
• Concise
• Well-organized
• Strong
• Grammatical

Satisfactory (3-4):

The post

• Addresses the issue clearly, but misses some of the necessary analysis
• Doesn’t link the recommendation to the goals as clearly as possible

The writing style could be clearer or more concise. There are several minor issues with grammar and spelling, but they don’t affect comprehension. Unsatisfactory (0-2):

• No post.
• The post does not address the issue, or states a recommendation or conclusion with no supporting argument.
• Lack of organization makes the posting very hard to read.
• Writing style or grammar makes the post very hard to understand.