Sidney Wolk is the founder of The Cross-Country Group which, over the years, he has turned from a small enterprise into one of the largest privately held service companies of its kind in North America. The company mainly operates in the field of roadside and housing services a provider a private label services. As a deeply involved manager, he leaned towards individuals instead of a formal compensation scheme for many years. When his two sons, Howard and Jeffrey joined the business, they saw the necessity to turn their father’s rather spontaneous and unpredictable compensation style into a more professionalized and transparent approach. This gave rise to the LEAP plan which will be discussed in detail during the course of this case study. While certainly being more sophisticated than the earlier compensation practices, two executive employees, Bruce Henderson and Martin Wong, did not fully agree with the overall concept of the LEAP plan. As part of the “Before You Move” subsidiary, they are in charge to manage a rather dynamic and unpredictable business which requires a high degree of entrepreneurial spirit and creative leadership. To better align the compensation plan to the specific circumstances of this particular business, they bring forward a counter proposal which is would result in a partial ownership of equity after having achieved the set goals, which differs from the initial LEAP plan where the compensation would result in cash payments. The main challenge for The Cross Country Group is to identify the most suitable compensation plan that both satisfies the employees and the owners while representing an effective incentive system to achieve the company’s strategic objectives.
Question 1: Evaluate the strengths and weaknesses of the LEAP plan
The following points summarize the main strengths and weaknesses of the LEAP plan in comparison the initial compensation approach practiced by Sidney Wong in the past.
The LEAP plan is more transparent and has clearly defined objectives and performance measures. From an employee perspective, this reduces the feeling of subjectivity and randomness of the compensation practices which could occasionally be seen as unfair.
The combination of sales and net income measures creates the desired balance between profitability and growth which are the key strategic objectives stated by the Wong family.
Since performance is measured based on internal performance measures, the employees have a considerable influence on the outcome of compensation they receive. This could be seen as more fair than external performance measures such as valuation multiples.
The 3-year trailing pay-out encourages a more long-term thinking as opposed to the on-the-spot handed out cash bonuses.
A more transparent and predictable compensation plan might be more lucrative and therefore increase the recruiting success for external senior managers and young MBA graduates.
While the compensation plan offers a reasonably high participation in sharing company success, no equity shares are distributed to the executives which would lead to the dilution of the Wong family.
The sudden professionalization of the compensation scheme might be a cultural shock to the current employees who were used to the more personal hands-on compensation practices of Sidney Wong.
While in the old compensation approach, Sidney Wong could assess and reward the employees on a highly individual basis, the new compensation plan links all executives to one pool and only each executive’s initial share of the pool can be defined individually.
The LEAP plan’s strict termination policies could lead to significant losses of expected compensation and potentially induce employees to make highly risky or unethical decisions.
Being only based on sales and pre-tax income, the LEAP plan does not take into account any non-financial performance measures which could be particularly