Reference no: EM13222904

In 1988, Du Pont's fiber division introduced a new incentive program for its 20,000 employees, including both management and lower-level employees. The novelty of the program was that a portion of the employees' annual pay (approximately 5%) would be placed into a pool. If the business exceeded its profit target for the year, then each employee would receive a multiple of the money placed in the pool as a bonus (e.g., if an employee's contribution to the pool was $100, then he would receive, say, 1.3 x $100). If the business profits were below the target for the year, then the employees would lose the money placed in the pool. The incentive program was adopted initially for 3 years. In 1990, due to a decrease in demand and an unexpected increase in input prices, it was clear that business profits would be substantially below the target set for that year, and therefore employees would lose the money in the pool, which amounted to a significant financial loss for them. Given the substantial employee discontent that ensued, Du Pont decided to cancel the incentive program in October 1990, calling it a "big mistake".

a) Use Principles I and II to analyze Du Pont's incentive scheme.

b) Propose an alternative incentive program (with similar features) that you think might work better than Du Pont's original plan