IB Business Management SL 2.4.6 Financial rewards Question Bank

AFA’s growth created diseconomies of scale, declining gross and net profit margins, management unhappiness and concerns about recruitment. Sam and Finn disagreed about fringe payments, a worker cooperative and a possible takeover. The potential international retailer could provide fresh capital, online presence and intangible assets, but might not retain employees or managers and could threaten AFA’s fair-trade mission and stakeholder relationships. The existing financial data and takeover details in this question’s root must remain available to the user.

AFA was at a critical point. Sam and Finn had not fully resolved their disagreements. They seemed to be constantly arguing but Sam could also see that new issues were emerging. At their most recent meeting in early 2018, Finn provided the following financial information to illustrate the declining trend in gross profit margin.

In addition, the recruitment of new staff was becoming a problem, as the wages that A F A offered were much lower than fair trade competitors. In a meeting between Sam and Finn, they argued over the best way to financially reward and motivate newly recruited workers, given the lower wages paid by A F A.

Finn argued for a reward system based on fringe payments (perks), as this was being offered by AFA's main competitors, the supermarkets. Sam countered that AFA should form a cooperative involving all physical stores. He argued that creating a worker cooperative could give all members a sense of community and fulfillment and motivate them so that all members of the cooperative would benefit. There would also be additional stakeholder benefits. Finn argued that a worker cooperative was too difficult to organize and operate and would not solve the problem of recruiting staff.

In the meantime, A F A was continuing to attract a good deal of publicity. Sam had appeared on a national television show about young, innovative entrepreneurs. After the television show ended, one very large international retailer with a strong online presence contacted Sam about the possibility of a takeover. Sam initially refused, but as the details of the takeover became clear he started to seriously consider the opportunity. By selling the business Sam would have enough fresh capital to start new, innovative businesses and make some of his other visions and ideas into reality. In addition to the corporate social responsibility (CSR) AFA was generating, the takeover would give AFA access to other intangible assets. However, the international retailer had indicated that it could not guarantee keeping all existing and newly recruited employees and managers. Finn and Kim were both very worried that Sam would even contemplate the takeover, which they felt was an act of betrayal to all the stakeholders of AFA.

Explain one benefit and one cost to AFA of using fringe payments (perks) to financially reward staff.