Physician Employment Current Compensation Trends and Considerations in Establishing FMV
Performance Measurement, Compensation, And Multinational Considerations
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Transcript of Performance Measurement, Compensation, And Multinational Considerations
Performance Measurement,Compensation,and Multinational Considerations
By:
Ashwin Chaudhary
23-2To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Financial and Nonfinancial Measures
Firms are increasingly presenting financial and nonfinancial performance measures for their subunits in a Balanced Scorecard, and it’s four perspectives:
1. Financial
2. Customer
3. Internal Business Process
4. Learning and Growth
23-3To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Balanced Scorecard Flow
Firms assume that improvements in learning and growth will lead to improvements in internal business processes
Improvements in the internal business processes will lead to improvements in the customer and financial perspectives
23-4To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Accounting-Based Performance Measures Requires a six-step design process:
1. Choose Performance Measures that align with top management’s financial goals
2. Choose the time horizon of each Performance Measure
3. Choose a definition of the components in each Performance Measure
4. Choose a measurement alternative for each Performance Measure
5. Choose a target level of performance
6. Choose the timing of feedback
23-5To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Step 1: Choosing among Different Performance Measures Four common measures of economic performance:
1. Return on Investment
2. Residual Income
3. Economic Value Added
4. Return on Sales Selecting Subunit Operating Income as a metric is
inappropriate since it obviously differs simply on the differing size of the subunits
23-6To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Return on Investment (ROI)
ROI is an accounting measure of income divided by an accounting measure of investment
IncomeInvestmentROI =
23-7To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
ROI
Most popular metric for two reasons:1. Blends all the ingredients of profitability
(revenues, costs, and investment) into a single percentage
2. May be compared to other ROIs both inside and outside the firm
Also called the Accounting Rate of Return (ARR) or the Accrual Accounting Rate of Return (AARR)
23-8To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
ROI
ROI may be decomposed into its two components as follows:
ROI = Return on Sales X Investment Turnover
This is known as the DuPont Method of Profitability Analysis
Income Income RevenuesInvestment Revenues InvestmentX=
23-9To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Residual Income
Residual Income (RI) is an accounting measure of income minus a dollar amount for required return on an accounting measure of investment
RI = Income – (RRR x Investment) RRR = Required Rate of Return
Required Rate of Return times the Investment is the imputed cost of the investment Imputed costs are costs recognized in some situations,
but not in the financial accounting records
23-10To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Economic Value Added (EVA®)
EVA is a specific type of residual income calculation that has recently gained popularity
Weighted-average cost of capital equals the after-tax average cost of all long-term funds in use
After-tax Weighted-Average Total CurrentOperating Income Cost of Capital Assets Liabilities ) }EVA {= X (
23-11To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Return on Sales (ROS)
Return on Sales is simply income divided by sales
Simple to compute, and widely understood
23-12To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Step 2: Choosing the Time Horizon of the Performance Measures Multiple periods of evaluation are sometimes
appropriate ROI, RI, EVA, and ROS all basically evaluate
one period of time ROI, RI, EVA, and ROS may all be adapted
to evaluate multiple periods of time
23-13To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Step 3: Choosing Alternative Definitions for Performance Measures
Four possible alternative definitions of investment:
1. Total Assets Available
2. Total Assets Employed
3. Total Assets Employed minus Current Liabilities
4. Stockholders’ Equity
23-14To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Step 4: Choosing Measurement Alternatives for Performance Measures
Possible alternative definitions of cost:1. Current Cost
2. Gross Value of Fixed Assets
3. Net Book Value of Fixed Assets
23-15To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Step 5: Choosing Target Levels of Performance Historically driven targets used to set target
goals Goal may include a Continuous Improvement
component
23-16To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Step 6: Choosing the Timing of the Feedback Timing of feedback depends on:
How critical the information is for the success of the organization
The specific level of management receiving the feedback
The sophistication of the organization’s information technology
23-17To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Performance Measurement in Multinational Companies Additional Difficulties faced by Multinational
Companies: The economic, legal, political, social, and cultural
environments differ significantly across countries Governments in some countries may impose controls
and limit selling prices of a company’s products Availability of materials and skilled labor, as well as
costs of materials, labor, and infrastructure may differ across countries
Divisions operating in different countries account for their performance in different currencies
23-18To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Distinction between Managers and Organization Units The performance evaluation of a manager
should be distinguished from the performance evaluation of that manager’s subunit, such as a division of the company
23-19To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
The Trade-Off: Creating Incentives vs. Imposing Risk An inherent trade-off exists between creating
incentives and imposing risk An incentive should be some reward for
performance An incentive may create an environment in
which suboptimal behavior may occur: the goals of the firm are sacrificed in order to meet a manager’s personal goals
23-20To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Moral Hazard
Moral Hazard describes situations in which an employee prefers to exert less effort (or report distorted information) compared with the effort (or accurate information) desired by the owner because the employee’s effort (or the validity of the reported information) cannot be accurately monitored and enforced
23-21To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Intensity of Incentives
Intensity of Incentives – how large the incentive component of a manager’s compensation is relative to their salary component
23-22To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Preferred Performance Measures
Preferred Performance Measures are those that are sensitive to or change significantly with the manager’s performance
They do not change much with changes in factors that are beyond the manager’s control
They motivate the manager as well as limit the manager’s exposure to risk, reducing the cost of providing incentives
May include Benchmarking
23-23To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Performance Measures at the Individual Activity Level Two issues when evaluating performance at
the individual activity level:1. Designing performance measures for
activities that require multiple tasks
2. Designing performance measures for activities done in teams
23-24To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Compensation for Multiple Tasks
If the employer wants an employee to focus on multiple tasks of a job, then the employer must measure and compensate performance on each of those tasks
23-25To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Team-Based Compensation
Companies use teams extensively for problem solving
Teams achieve better results than individual employees acting alone
Companies must reward individuals on a team based on team performance
23-26To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Executive Compensation Plans
Based on both financial and nonfinancial performance measures, and include a mix of: Base Salary Annual Incentives, such as cash bonuses Long-Run Incentives, such as stock options
Well-designed plans use a compensation mix that balances risk (the effect of uncontrollable factors on the performance measure, and hence compensation) with short-run and long-run incentives to achieve the firm’s goals
23-27To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Strategy and Levers of Control
Levers of Control: Diagnostic Control Systems Boundary Systems Belief Systems Interactive Control Systems
Each lever is important and needs to be monitored Levers should be interdependent and collectively
represent a living system of business conduct
23-28To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Diagnostic Control Systems
Diagnostic Control Systems evaluate whether a firm is performing to expectations by monitoring and evaluating critical performance metrics, including: ROI, RI, EVA Customer Satisfaction Employee Satisfaction
MUST be balanced by the other lever of control
23-29To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Boundary Systems
Boundary Systems describe standards of behavior and codes of conduct expected of all employees Highlights actions that are “off-limits” A code of conduct describes appropriate and
inappropriate individual behaviors
23-30To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Belief Systems
Belief Systems articulate the mission, purpose, and core values of a company
They describe the accepted norms and patterns of behavior expected of all managers and employees with respect to each other, shareholders, customers, and communities
23-31To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Interactive Control Systems
Interactive Control Systems are formal information systems that managers use to focus organizational attention and learning on key strategic issues
Tracks strategic uncertainties that businesses face