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

15th, 2014.

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
10    8%
11    8%
12    10%

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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