case

com/ne ws/ 76/61/Lo

Relative-Perform /.ong-term-Incentive - Plans-with- ympic Car Wash

24 See, for example, D. Ghosh, "Alternative Measures of Managers' Performance, Controllability, and the Out come Effect," Behavioral Research in Accounting,(2005), pp. 55-70. 25 See, for example, S. A. Butler and D. Ghosh, "Individual Differences in Managerial Accounting Judgments and Decision Making," British Accounting Review, 47, no. 1 (March 2015), pp. 33-45. 26 This statement was the subject of a research article focused on examining excuse cultures: F. Larmande and J. P. Ponssard, "Fishing for Excuses and Performance Evaluation," Review of Accounting Studies, 19, no. 2 (June 2014), pp. 988-1008.

For an overview,, Contracting, Journal

Measurements.

Bol, "Subjectivity in Compensation enal of Accounting Literature, 28 (2009).

M. Gibbs, K. Merchant, W. Van der

ee,

for

Kample, F. Moers, "Discr and Bias in Perfor

ounting,organizations and Society, 30, no. 1 (Jan

M. Vargus, "peterminants and Effects of Sub.

op.

1-24.

See

also M.

ectivity in

lncentives," The

April 2004),

Pp. 409-36.

counting Review, 79, n0.2 Stede

ation: The Impact of Diversity and Subjectiv

ary

2005), PP.

67-80.

CASE STUDY

Olympic Car Wash

rhe Olympic Car Wash Company owned and operated

ad car washes in Belgium. The general managers of

each of the 30 locations reported to Jacques Van Raem- donck, Olympic's chief operating officer.

At the end of each quarter, Jacques had to evaluate the performances of each of the car wash locations.

His evaluations determined the size of a bonus pool more hours than were assumed in the company's that was allocated to personnel at the location. If the budget, and actual profits for all of the locations were location achieved its budgeted profit target, ¬3,000 far below the budgeted profit level. The results for the was put into the bonus pool. The pool was also aug- Aalst location are shown in Figure 1. Figure 2 shows

mented by ¬l for every ¬10 the location exceeded its

profit target. However, the bonus contract gave Jacques the right

to make subjective adjustments for the effects of factors

he deemed outside the control of personnel at the loca- tion. In the past few years, Jacques had made such adjustments for the adverse effects on revenue of con-

rained, and it rained frequently in Belgium. The budget, which was updated quarterly, was prepared based on an assumption of hours of good weather. Inevitably, though, those assumptions were not accurate.

During the recent spring quarter, it rained many

Figure 1 Profit vs. budget for Aalst location for spring

quarter

Budget Actual Variance

Revenue struction taking place on the street just in front of one car wash location and to cover the costs of vandalism at another location.

e184,000 ¬124,080 E(59,920)

Variable expenses 92,000 62,040 29,960 (50% of revenue)

By far the largest uncontrollable factor that Cgues had to consider was, however, the weather. in particular, sales volume dropped sharply when it

Fixed expenses 53,820 55,000 (1,180)

Total expenses 145,820 38,180

117,040 28,780 (31,140) Profit 7,040

531

some operating assumptions and quarter. The Aalst location is pen Chapter 12

Using Financial

Results

Controls in the

Presence of

Uncontrollable

Facto..

Figure 2 Operating

statistics for Aalst

location for

spring quarter

statistics for the every day, per day, when it is not raining. The car are paid the legally required minimu fixed amount

for ch car wash com npleted

wash emp Budget

Assumption

m wage phur a Actual

costs are largely variable with revenues 1How large should the bonus pool he 24 \ahoe

23

Averape umber of

vehicles

washed in a pood weather

hou

for location? he Aals

¬11.00 ¬10.00

Averape revenue per

vehicle 920

920

Total hors n quarter 120

450 470

Hours of bad weather 800

Hours of pood weather

This case was prepared by

Professors Kenneth A.

Merchant and Wim

A. Van der Stcde.

Caprigh: Cb Kenneth A.

Merchant and Wim A. Van der Stede

CASE STUDY

Beifang Chuang Ye Vehicle Group

On January 1, 1999, the municipal government

of 1999 the Beifang dealers had no cars meeting the legal

Beijing (People's Republic of China) mandated

a new

vehicle emission control standard. The new law,

in

essence, required all passenger vehicles sold within the

Beijing city limits to be equipped with a fuel injection

system, rather than an older carburetor system.

This new law did not come as a surprise to the man-

agers of Beifang Chuang Ye Vehicle Group, a large

group of companies that included four automobile

dealership locations in Beijing. They had become

aware of the impending new law about a year earlier. However, like most other Beijing dealers and the man- The company

ufacturers who supplied the vehicles, they did not

believe that the Beijing government would actually Beifang Chuang Ye Vehicle Group

(Beifang) was a hou

enforce the new law. But it did! The government would ing companycomprised of 14 companies,

requirements to sell. In January 1999, their new car

sales fell to zero.

Now, in early February 1999, Ming Zhou (vice direc

tor and general manager) had to decide, among other

things, whether he should compensate his dealership

managers and sales personnel as if

this unfortunate

external circumstance had not happened

or whether

they should be made to share the company's

losses, and

if so, to what extent.

not register any vehicles that did not meet the new, operated in segments of the

ansportation

anies marketi

most of which

ket in

tighter emission standards. As a consequence, in early

A similar law was made effective across the entire People's Republic rental company, an

automobile association

(with 160,0

three taxi companies (operating 3,600

vehicles), northern China. Among the Beifang compani a car

of China on September 1, 2001. members in northern China), an

advertising

compa

532