You’re a consultant for GlobaTech, a relatively large technology
company with $800 million a year in revenue and 1,233 employees.
Recently many of their employees have left the company. Job
attrition is costly for the company. The hiring, training, and
integration of each new person costs money, not to mention the work
lost during the search process. You are asked to help GlobaTech in
identifying important areas for improvement with respect to
employee retention.

1. GlobaTech believes that they should start offering
end-of-year bonuses that cost a total of $780,000. The hope is that
this investment will increase their yearly retention rate. Each
additional employee that is retained yields the company an average
of $2,400. Suppose the effectiveness of the program is a function
of the economic climate in the next year. The economy can be weak
or strong. GlobaTech believes that the bonuses will increase
retention by 10% in a weak economy and 4% in a strong economy. They
have estimated the probability of a declining economy at 25% and an
expanding economy at 75%.

Q1: What decision should the company make in order to maximize
profits?

Q2: What is the expected monetary value of this decision? Show
your work. (Recommended answer: 2-3 sentences and
calculations.)

Payoff with weak economy = % increse in retention xnumber of
employees x benefit from ech retention

Payoff with weak economy = 0.1 x1233x2400 = 295920

Payoff with strong economy = 0.04 x1233x2400 =118368

Total payoff = P(weak economy) x payoff with weak economy+ P(
strong economy) x payoff with strong economy

= 0.25 x295920+0.75×118368 = 73980+88776 = 162756

The net payoff value of the bonus is 162756, which is
significantly less than the cost of bonus value ( 780000). The net
value of this decision is (-780000+162756) = -617244.

Since the net value is negative, the company should not go for
bonus