An oil and gas company generally rewards its employees with an annual bonus.
An oil and gas company generally rewards its employees with an annual bonus. The company announced that the 2013 bonus would be paid out at 125% of target on January
The bonus target is set as a percentage of the employee salary. The employee’s actual bonus award payout may increase or decrease from the bonus target, depending on
the company’s annual performance. (If the company has a good year, the bonuses may be higher than target.) Additionally, good individual performance on the employee’s
part can increase the employee’s bonus. If an employee receives a year-end performance rating of a 1, their bonus is increased by 20%, and if they receive a rating of
2, their bonus is increased by 10%. All ratings of 3, 4, or 5 will be paid out at the target plus (allowing for increases/decreases due to company performance).
The bonus is accrued each year using the target bonus percentage plus 1%, to accrue for performance fluctuations.
If an employee’s current salary is $90,000 annually and their target payout is 10% of their annual salary, the employee’s annual bonus would be $9,000. If the company
decided to pay out at 150% of target, then employee’s bonus would then be $13,500. If this employee received a performance rating of 1, this bonus would be an
additional 20% higher; therefore the employee bonus would be a total of $16,200. Since the company accrues at target + 1%, the accrual for this employee at the end of
2013 would have been $9,900 (11% accrued).
Use the data below to answer the questions.
Employee Salary Grade Annual Salary Performance Rating
Sarah 10 58,000 3
Ben 12 80,000 1
Stephen 11 64,000 1
Mary 12 78,000 2
Jennifer 10 60,000 3
Salary Grade Bonus Target
a. Determine the monthly accrual amount for each of the 5 employees based on the target plus 1% accrual assumption.
b. Determine the total payout for each employee based on the actual payout percentage; be sure to include any adjustments for performance.
c. Assume these employees all pay 39% tax on their bonus. What is their total after tax take home bonus, per employee?
d. Write a short (professional) email to the CFO of the company explaining the total bonus payout using the 125% of target, including all performance adjustments.
Explain the differences between the total accrual and the total payout number.
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