Fictional performance and incentives

A fictional division has operating profit180and invested operating assets1000. Its required capital charge is12percent in this simplified model. Management offers another project requiring200additional assets and generating30additional annual operating profit with comparable risk and consistent measurement. The division manager is rewarded solely for increasing its average ROI and therefore objects to the new project. A board member believes any objection proves dishonesty, while another suggests replacing every financial indicator with training hours. The task is to calculate the incentive conflict and propose proportionate evaluation. All numbers are fictional and no financing, tax or accounting policy change is assumed. Real implementation would also examine service quality, timing, capacity, uncertainty and who can influence each result.