1 / 20

Rewarding Business Performance

Rewarding Business Performance. Chapter 25. Motivation and Aligning Goals and Objectives. Goal Congruence Alignment of employee goals and objectives with organizational goals and objectives. Motivation and Aligning Goals and Objectives. Feedback Steer employees toward goals

soleil
Download Presentation

Rewarding Business Performance

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Rewarding Business Performance Chapter 25

  2. Motivation and AligningGoals and Objectives Goal CongruenceAlignment of employee goals and objectives with organizational goals and objectives.

  3. Motivation and AligningGoals and Objectives • Feedback • Steer employees toward goals • Measure progress in achieving goals Measureperformance Improveperformance Rewardperformance. Rewardperformance

  4. Return on investment is the ratio ofoperating income to the average investment used to generate the income. Operating Income Average Total Assets ROI = Return on Investment (ROI) Using ROI to evaluate business performanceis often referred to as the DuPont system.

  5. Components of ROI

  6. Profit Sales Sales Average Investment ROI = × $30,000 $500,000 $500,000 $200,000 ROI = × ROI = 6% × 2.5 = 15% Return on Investment (ROI) Operating Income Average Total Assets ROI = $30,000 $200,000 = 15% ROI =

  7. Three ways to improve ROI Improving ROI • Decrease Expenses • Increase Sales Prices • Lower • Invested Capital

  8. As division manager at Winston, Inc., your compensation package includes a salary plus bonus based on your division’s ROI -- the higher your ROI, the bigger your bonus. The company requires an ROI of 15% on all new investments -- your division has been producing an ROI of 30%. You have an opportunity to invest in a new project that will produce an ROI of 25%. Criticisms of ROI As division manager would you invest in this project?

  9. Residual Income Operating Earnings – Investment charge = Residual income Investment capital ×Minimum return = Investment charge Investment center’sminimum acceptablereturn

  10. Residual Income Operating Earnings = $25,000 – Investment charge = 20,000 = Residual income = $ 5,000 Investment capital = $100,000 ×Minimum return = × 20% = Investment charge = $ 20,000 Investment center’sminimum acceptablereturn

  11. Residual Income Residual income encourages managers to make profitable investments that would be rejected by managers using ROI.

  12. Economic Value Added Economic value added tells us how much shareholder wealth is being created.

  13. Economic value addedis the annual after-tax operating profit minus the total annual cost of capital. Cost of capitalis weighted-average after-taxcost of long-term borrowing and the cost of equity. Economic Value Added Equity Debt

  14. Economic Value Added After-tax Operating Income – Investment charge =Economic value added (Total assets – current liabilities) ×Weighted-average cost of capital = Investment charge After-tax cost oflong-term borrowingand the cost of equity

  15. Economic value added can be improved in three ways . . . Increase profit without using more capital. Use less capital to earn the same amount of profit. Invest capital in high-return projects. Economic Value Added

  16. A set of performance targets and results that show an organization’s performance in meeting its responsibilities to various stakeholders. Balanced Scorecard

  17. Balanced Scorecard Financial Perspective How do we lookto the firm’s owners? Vision and Strategy Learning and Growth PerspectiveHow can we continuallyimprove and create value? Business ProcessPerspective In which activities must we excel? Customer Perspective How do our customers see us?

  18. Components of Management Compensation I prefer a bonus arrangement that gives me the opportunity to earn larger amounts. I don’t mind the varying compensation. I like both profit sharing and stock options. I prefer a fixed salaryso that I know whatI will be paid each year.

  19. Design Choices for Management Compensation Should we rewardcurrent performance orfuture performance? Should teams ofemployees sharebonuses equally orshould theybe in competition? Should bonuses befixed or should theyvary with aperformancemeasure? Should bonuses bebased on local orcompany-wideperformance? Should our rewards be based on accountingnumbers or stock price performance?

  20. End of Chapter 25

More Related