Register now or log in to join your professional community.
The drawback is that area managers will take inappropriate / suboptimal investment decisions resulting in inefficient use of available funds.
Explanation:
Assume net profits were $800 for last year and the target net profit growth rate is 5%.
To secure his reward, an area manager invested $500 (at the start of year) in new shops and raised the profits to $848 (6% growth).
Return on this new investment is 9.6% (48*100/500).
However, required rate of return (the cost of capital) is 15% for the company. And,
Head office was able to efficiently invest these funds elsewhere.
(All are invited to provide more precise answers that may help readers to grasp the point)
Do you need help in adding the right keywords to your CV? Let our CV writing experts help you.