Starting as a local metals distributor, Quality Metal Service Center (QMSC) had grown into a firm that distributes

metals on a national scale. Since the 1930s Great Depression QMSC had experienced rapid sales growth and geographical expansion. Its sales in 1991 was well over $750 million and in 1992, QMSC operated in more than 20 locations situated in markets representing about 75 percent of metal consumption in the United Sates. In the early March of that same year, the president and chief executive officer, Edward Brown believed that QMSC is very well capable of achieving even higher levels of sales and profits. Mr. Brown feels that QMSC may have missed out on some growth opportunities because of the controls that are currently in placed in the company, which may have inhibited managers from pursuing QMSCs goals of aggressive growth and above-average return on assets (ROA), versus the industry. QMSC has its operations in 4 regions, each region having 6 districts and individual district managers assigned per district. The district mangers were responsible for attaining the predetermined ROA levels, which was agreed upon at the beginning of the each year. To motivate the district managers in achieving their ROA, each has an incentive bonus which was based on a formula that tied the bonus to meeting and exceeding 90 percent of their ROA. Ken Richards, the district manager for the Columbus Service Center received a capital investment proposal from his sales manager, Elizabeth Barret in March of 1992. For 1992, Mr. Richards targeted figure for operating profit was $3.8 million and his targeted assets were set at $10 million which would yield a ROA of 38 percent. Mr. Richards is now contemplating if he would send the investment proposal to corporate head quarters for approval. Taken from the point of view of an MBA student, the primary purpose of this study is to (1) address Mr. Richards dilemma on the new investment proposal presented to him. (2) Make recommendations on QMSCs controls, namely the districts performance measures and incentive plan, which Mr. Brown feels may be hindering the growth of the company. With the new investment proposal, Mr. Richards incentive bonus would only yield 4.28% of his base salary, which is less than the 11.1% incentive bonus he would receive without the investment plan. Nonetheless, Mr. Richards should send the investment proposal to corporate head quarters, because this would help the company maximize its profits and attain its goal of expanding to new markets and generating positive sales growth for QMSC. As seen in the case of Mr. Ken Richards, simply tying the district managers incentive bonus to their ROA, could lead to the risk of moral hazard, due to the conflicting interest of the district manager and the company. To counter this kind of agency problem, the group recommends the following; (1) the district managers incentive plan can be a combination of Economic Value Added (EVA) and ROA. EVA being a monetary amount will allow managers to make investments that would yield returns more than its cost of capital, which will ultimately lead to better profits and growth for QMSC. (2) Implementation of non-financial performance measures such as; the level of customer

service, quality and product availability. End users, during this time were reducing the number of suppliers with whom they did business and were concentrating their purchases with those that were best able to meet their specific quality, availability and service requirements. Implementation of those non-financial performance measures would result to repeat-buying and customer loyalty, which would lead to an increase in QMSCs brand and market equity.