| HBS Case Collection
(Revised from original 2003 version)
Investigates the "controllability problem" inherent in bonus systems. Ideally, an incentive system accurately measures performance in areas that the individual can control. But most measures are either too broad, including factors outside the influence of the employee, like team or industry performance, or they are too narrow. That is, the performance measures are too easily controlled, and thus gamed by the employee. In this case, Production Manager Phil Evans' initial bonus plan is based on plant profitability, treating the plant as a profit center. But revenues are outside his control, leading him to protest when sales fall. In the revised bonus system, where Evans is rewarded for controlling costs, the plant is treated as a cost center. However, accidents in the plant and a new inspection policy increase his costs. His renewed protests create a dilemma for Regional President Sarah Clark.
Barro, Jason R., Brian J. Hall, and Aaron Zimmerman. "Hearthside Homes." Harvard Business School Case 904-003, September 2004. (Revised from original September 2003 version.)