Ee.101. The Tamura International Trading Company plans to hire a manager for its division in Mexicali. Tamura International's president and vice president of personnel are trying to decide on an appropriate incentiveemployment contract. The manager will operate far from the Tokyo corporate headquarters, so evaluation by personal observation will be limited. The president insists that a large incentive to produce profits isnecessary; he favors a salary of ¥275,000 and a bonus of 10% of the profits above ¥1,700,000. If operations proceed as expected, profits will be ¥4,100,000 and the manager will receive ¥515,000. But bothprofits and compensation might be more or less than planned. The vice president of personnel responds that ¥515,000 is more than most of Tamura International's division managers make. She is sure that thecompany can hire a competent manager for a guaranteed salary of ¥475,000. She argued, "Why pay ¥515,000 when we can probably hire the same person for ¥475,000?"Read the requirements.CRequirement 1. What factors would affect Tamura International's choice of employment contract? Include a discussion of the pros and cons of each proposed contract.The bonus contract providesInternational of this risk isVincentive to generate profits than does the straight salary. It also imposes risk on theThe choiceIf the vice-president of personnel is correct, the expected cost to Tamurabe based on whether the incentive under the bonus plan is likely to be worth the cost of the risk.Another factor to consider is that highly qualified managersseek contracts with a bonus because they would beBecause Tamura International receives of every ¥10 of extra profit generated, attracting a highly qualified manager¥Requirement 2. Why is the expected compensation more with the bonus plan than with the straight salary?If the expected compensation did not differ, managers would prefer a contract withrisk. Extra compensationto be advantageous.to offset the added risk.

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The Tamura International Trading Company plans to hire a manager for its division in Mexicali. Tamura International's president and vice president of personnel are trying to decide on an appropriate incentive employment contract. The manager will operate far from the Tokyo corporate headquarters, so evaluation by personal observation will be limited. The president insists that a large incentive to produce profits is necessary, he favors a salary of ¥275,000 and a bonus of 10% of the profits above ¥1,700,000. If operations proceed as expected, profits will be ¥4,100,000 and the manager will receive ¥515,000. But both profits and compensation might be more or less than planned. The vice president of personnel responds that ¥515,000 is more than most of Tamura International's division managers make. She is sure that the company can hire a competent manager for a guaranteed salary of ¥475,000. She argued, "Why pay ¥515,000 when we can probably hire the same person for ¥475,000?" Read the requirements