rewarding business performance
DESCRIPTION
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 - PowerPoint PPT PresentationTRANSCRIPT
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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
Copyright © 2012 The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
Rewarding Business Rewarding Business PerformancePerformanceChapter 25
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Goal CongruenceAlignment of employee goals
and objectives with organizational goals and
objectives.
Motivation and AligningMotivation and AligningGoals and ObjectivesGoals and Objectives
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Motivation and AligningMotivation and AligningGoals and ObjectivesGoals and Objectives
Feedback Steer employees toward goals Measure progress in achieving goals
Measureperformance
Improveperformance
Rewardperformance.
Rewardperformance
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Return on Investment (ROI)Return on Investment (ROI) Return on investment is the ratio of
operating income to the average investment used to generate the
income.
ROI = Operating Income Average Total Assets
Using ROI to evaluate business performanceis often referred to as the DuPont system.
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Components of ROI
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Return on Investment (ROI)Return on Investment (ROI)
SalesAverage InvestmentROI = Profit
Sales ×
ROI = 6% × 2.5 = 15%
$500,000$200,000ROI = $30,000
$500,000 ×
ROI = Operating IncomeAverage Total Assets
ROI = $30,000$200,000
= 15%
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Improving ROIImproving ROI
Increase Sales Prices
Decrease Expenses
Lower Invested Capital
Three ways to improve ROI
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Criticisms of ROICriticisms of ROIAs 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%.
As division manager would you invest in this project?
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Operating Earnings– Investment charge = Residual income
Investment capital× Minimum return = Investment charge
Residual IncomeResidual Income
Investment center’sminimum acceptable
return
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Residual IncomeResidual 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 acceptable
return
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Residual income encourages managers to make profitable investments that would
be rejected by managers using ROI.
Residual IncomeResidual Income
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Economic value added tells us how much shareholder wealth is
being created.
Economic Value AddedEconomic Value Added
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Economic Value AddedEconomic Value AddedEconomic value added is the annual after-tax operating profit minus the
total annual cost of capital.
Cost of capital is weighted-average after-tax
cost of long-term borrowing and the cost of equity.
DebtEquity
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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 borrowing
and the cost of equity
Economic Value AddedEconomic Value Added
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Economic Value AddedEconomic Value AddedEconomic 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.
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Balanced ScorecardBalanced ScorecardA set of performance targets and results
that show an organization’s performance in meeting its
responsibilities to various stakeholders.
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Financial PerspectiveHow do we look
to the firm’s owners?
Learning and Growth Perspective
How can we continuallyimprove and create value?
Business ProcessPerspective
In which activities must we excel?
Customer PerspectiveHow do our
customers see us?
Balanced ScorecardBalanced Scorecard
Visionand
Strategy
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Components of Management Components of Management CompensationCompensationI prefer a fixed salaryso that I know what
I will be paid each year.
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.
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Design Choices for Design Choices for Management CompensationManagement Compensation
Should we rewardcurrent performance or
future performance?
Should our rewards be based on accounting
numbers or stock price performance?
Should bonuses befixed or should they
vary with aperformance
measure?
Should bonuses bebased on local or
company-wideperformance?
Should teams ofemployees share
bonuses equally orshould they
be in competition?
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End of Chapter 25End of Chapter 25