American steel Corporation

1. American steel Corporation Next class: Formosa Plastics

2. American Steel Corporation: Context • An integrated steel producer with annual sales in 1993 of about $4.5 billion. • Numerous divisions: • Headquarters (St. Louis ) • Warehouse Sales Division • operated 21 field warehouses throughout the US • half of sales were steel products (rod, bar, wire, tube, sheet, and plate) purchased from Mill Products Division • disappointment in the performance of the Warehouse Sales Division • Mill Products Division

3. Warehouse Sales Division: American Steel Corporation • New Performance Measurement System • Decentralize the management of the division • each branch warehouse manager responsible for the division’s activities in his or her geographic area. • compete with other producer-owned warehouses as well as with independently owned warehouses. • purchased their steel products from the Mill Products Division at the same prices charged to independently owned metal supply warehouses.

4. Warehouse Sales Division- American Steel Corporation: Issues • Performance Measurement System • Evaluate in depth the new incentive system. How, if at all, would you modify it? • ROI • What role should the new investment center incentive plan play in decisions such as Denver’s lease-versus-own issue? • Behavior with ROI as a performance measure

5. Warehouse Sales Division- American Steel Corporation • Performance Measurement System • “responsibility to “make the division grow, both in sales volume and ROI [return on investment],”” • “subject only to approval of the division’s annual profit plan and proposed capital expenditures by corporate headquarters.” • implementation required on the balance sheet

6. Effective Performance Measurement System

7. Warehouse Sales Division- American Steel Corporation • Compensation Plan Components: • 1. Base Salary • determined on dollar sales volume of the districts in the prior year; the higher the sales volume, the higher the range for which the manager becomes eligible. • actual salaries will be established by the Division’s general manager, • salary ranges will be reviewed periodically in order to keep them competitive with those of other companies in the metal supply warehouse business. • 2. Growth Incentive • the manager will earn $500 for every $100,000 of increased sales over the prior year (i.e., 0.50 percent of any sales increase)

8. Warehouse Sales Division- American Steel Corporation • Compensation Plan Components • 3. Return on Investment Incentive • an incentive will be paid in relation to the size of investment and return on investment. • No incentive will be paid to a manager whose branch earns less than 12 percent pretax ROI. • 50% of divisions earn less than 12% • No increase in incentive payment will be made for performance in excess of 50 percent pretax ROI. • No payment will be made in excess of $50,000, regardless of ROI performance. • Sliding scale of performance

9. Warehouse Sales Division- American Steel Corporation

10. Effective Performance Measurement System • Given the goals of the company which alternative incentive will motivate the desired behavior? • Process • participatory and easy to understand by employees • feed back provided • Incentives • congruent with reward systems – pay performance link • various types of compensation (e.g. salary, bonuses, options) • attainable performance levels • responsibility and control is considered (overall vs. divisional)

11. Effective Performance Measurement System • Given the goals of the company which alternative incentive will motivate the desired behavior? • Alignment with Organizational Goals • assesses progress toward organizational goals and objectives - promote intended behavior (critical success factors) • Measures • unlikely a single measure or even several measures will effectively assess performance • a mix of financial and nonfinancial metrics • absolute vs relative measures • includes both short and long term metrics • measures are observable (objective vs. subjective) • limit ability to manage/manipulate outcome measures

12. Warehouse Sales Division- American Steel Corporation • Given the goals of the company which alternative incentive will motivate the desired behavior? • Process • Incentives • Alignment with Organizational Goals • Measures

13. Warehouse Sales Division- American Steel Corporation • Own vs Buy • “I’m sure that the incentive compensation plan you put in last year is fair, but I didn’t know whether it adjusted automatically for the difference between owning and leasing, and I just thought I’d raise the question. “ • “…he said that he’s getting a lot better return on investment in his district because he’s in a leased facility”

14. Warehouse Sales Division- American Steel Corporation • Own vs Buy • Lease vs Own is a financing not operating decision • Current system appears to penalize managers in the short run who move to newer facilities • As capital decisions are infrequent, the incentive system should not be designed with capital decision as a primary issue • Suggest a process to deal with the impact of capital investment (e.g. upward adjustment in base)