Solved: Jensen Corporation is a holding company with

several diversified

Jensen Corporation is a holding company with several diversified divisions operating throughout
the United States. Jensen's management allows the divisions to operate on an autonomous
basis in most areas; however, the corporate office becomes involved in determining some
division strategies related to capital budgeting, development of marketing campaigns, and
implementation of incentive plans. The area of incentive plans has often been a problem to
Jensen because many of the companies it has acquired already had such plans in place. These
plans are not easily changed without causing discontent among the managers. Jensen has
striven for consistency among its divisions with regard to bonus and incentive plans, but this has
not always been achievable.
The restaurant division operates a chain of vegetarian restaurants, Hobbit Hole, in the eastern
United States. Jensen acquired it approximately three years ago and has made very few
changes to it.
The restaurant's reputation was well established and, aside from nominal changes in marketing
strategy, the chain has been allowed to operate in much the same manner as it did before its
acquisition.
In addition to a base salary, Hobbit Hole unit managers participate in the restaurant's profits.
This incentive plan was in place when Jensen acquired the chain; although the profit
percentage might vary among restaurant units, the overall plans are basically the same. The
unit managers are satisfied with this incentive strategy, and Jensen's management does not
believe that changes are necessary.
Jensen's motel division was formed 15 years ago when Jensen purchased a small group of
motels in the Midwest. Since that time, the division has grown significantly as the company has
acquired motels throughout the country using the name Cruise and Snooze Inns. Since its initial
motel purchase, Jensen has implemented its own incentive program for unit managers in the
individual motels. The incentive program provides annual bonuses based on the achievement of
specific goals that are not necessarily finance oriented but pertain to areas such as improved
quality control and customer service. This program requires administrative time, but Jensen
believes that the results have been satisfactory.

Required
1. Hobbit Hole's restaurant unit managers are covered by a profit participation incentive plan.
Discuss the following for this incentive plan:
a. Its benefits to Jensen Corporation.
b. The incentive effects that it could cause, if any.
2. The Cruise and Snooze Inns' motel unit managers participate in an incentive program based
on goal attainment. Discuss the following for this type of incentive plan:
a. Advantages to Jensen Corporation.
b. Disadvantages to Jensen Corporation.
3. Having two different types of incentive plans for two operating divisions of the same company
raises questions.
a. Describe the potential negative incentive effects of having different types of incentive plans

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 for Hobbit Hole and Cruise and Snooze Inns.
b. Present the rationale that Jensen Corporation can give to the unit managers of Hobbit Hole
and Cruise and Snooze Inns to justify having different incentive plans for two operating divisions
of the same company.
(CMA Adapted)

ANSWER
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