2. (Text, 5th Edition, Ch 15-9): Mrs. Fields’ Cookie Company is a very successful company out of Salt Lake City, Utah. The company sells freshly baked cookies to customers in shopping malls. The company has expanded and opened outlets in many cities such as San Francisco. Debbie Fields has been on the cover of several business magazines. The articles stress that Mrs. Fields works very long hours and is often at the stores monitoring the quality of the product and making sure the cookies are produced with “tender loving care.” The Fields have earned millions of dollars from this business. In 1986, they were planning to open new outlets throughout the country. They had a policy that they would not franchise units. To quote Mrs. Fields, "We do not want to turn into just another fast-food franchise company. Our success is based on high quality products produced with great care and love. We do not want to lose this quality by expanding through franchises. Rather, we prefer to maintain ownership of all units to ensure continued good service and quality." Evaluate the Fields’ franchising policy.
3. The Quantum Division of Nextel Corp., based in San Jose, California, manufactures semiconductors that convert analogue signals to digital signals. Lynn Kraft is the division manager. Her compensation consists of a base wage of $50,000 plus a bonus of 2 percent of division profits above $10 million. Last year’s division profits were $12 million, and so Kraft received a bonus of $40,000.
This year two things happened that adversely affected division profits. First, the price of gold, a key ingredient in Quantum’s chips, increased dramatically, causing the division’s costs to be higher than expected. Second, an earthquake in the San Jose area caused Quantum’s plant to be closed for 6 weeks and to require $1 million in repairs. Division profits for this year were $9 million.
Kraft believes her compensation plan should be adjusted for these events. She believes that, but for these events, division profits would have been $13 million for the year.
a. What issues should the CEO of Nextel consider when deciding whether to adjust Kraft’s bonus plan? Do you think the plan should be adjusted? Why?
b. Why might it be value increasing for the firm to make Kraft accountable for such events?
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