Week 9 Performance Measures

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Week 9 - Performance Measures

• Chapter 24 - Performance Measurement,
  Compensation, and Multinational Considerations

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Learning Objectives

• 1. Measure performance from a financial and
  non-financial perspective
• 2. Design an accounting-based performance measure
• 3. Analyze profitability using the DuPont method.
• 4. Use the residual-income measure and recognize
  its advantages.
• 5. Describe the economic value added method.
• 6. Distinguish between current cost and
  historical cost asset measurement

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Learning Objectives, Continued

• 7. Indicate the difficulties that arise when
  comparing the performance of divisions operating
  in different countries.
• 8. Recognize the role of salaries and incentives
  in compensation arrangements.
• 9. Describe the management accountants role in
  helping organizations provide better incentives.
• 10. Back-of-the-chapter exercises and problems
• 11. Customer relationship management
• 12. Analysis practice, Case 12, Jones Company
• 13. Case Web1, Brights Lodging and Travel

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Balanced Scorecard, translate strategy into
operational terms

• Financial
• Customer Internal Processes
• Learning and Growth

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Balanced Scorecard, Continued

• External financial perspective
• - bottom -line financial performance, return on
  capital, earnings per share growth
• Customer perspective
• - performance in target customer, market segments
• Internal business process perspective
• - focuses on those processes that will increase
  value to customers and lowers costs for improving
  financial performance
• Learning and growth perspective
• - people, systems, and organizational procedures

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Balanced Scorecard, Example

• Consider that you are the CEO of Canadian Tire,
  and that you want to develop a BSC for Canadian
  Tire Stores. What would the BSC look like? (What
  is the strategy of Canadian Tire?)
• Financial
• Customer
• Internal processes
• Growth and learning

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Accounting-Based Performance Measurement

• Steps to Take in Designing a System
• Step 1 Choose variable(s) that represent top
  managements financial goal(s)
• Step 2 Choose definitions of the items included
  in the variables in Step 1
• Step 3 Choose measures for the items included in
  the variables in Step 1
• Step 4 Choose a target against which to gauge
  performance
• Step 5 Choose the timing of feedback

Pages 825 - 826
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Return on Investment (ROI)
Income Investment

• Return on Investment
• popular approach to incorporate the investment
  base into the performance measure
• includes all the major ingredients of
  profitability (revenues, costs and investment)
• can break out the basic formula as follows
  (sometimes called the DuPont formula) to measure
  investment turnover and profitability

Return on Investment
Revenues Investment
Income Revenues
x

Profitability
Turnover
Pages 827 - 828
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Residual Income (RI)

• Residual Income
• Income - (Required Rate of return x
  Investment)
• required rate of return is also called the
  imputed cost of capital
• favoured by some firms as managers will focus on
  maximizing an absolute dollar amount (dollars of
  residual income) rather than a percentage (ROI)
• maximizing a may result in suboptimal
  performance
• managers earning high ROIs may reject projects
  that earn more than the companys required rate
  of return
• managers earning low ROI may accept projects
  that earn less than the companys required rate
  of return

Pages 828 - 829
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Economic Value Added (EVA)
Economic Value Added
Weighted-average cost of capital
After- tax Operating Income
Total assets
Current liabilities

-
x
-

• EVA uses the weighted-average cost of capital
  (WACC) as the minimum required rate of return
• WACC represents the after-tax cost of capital
  from all debt and equity sources
• many companies also make adjustments to the
  accounting definition of operating income such as
  capitalizing (and amortizing) RD, restructuring
  costs, and leases

Pages 829 - 831
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Alternative Measures of Performance

• When calculating ROI and RI, can consider
  investment as being
• total assets available
• total assets employed
• working capital plus long-term assets
• stockholders equity
• When considering long-term assets, firms value
  these assets based on
• current costs
• gross book value (historical cost)
• net book value (historical cost - accumulated
  amortization)
• replacement cost (cost to replace productive
  capacity)

Pages 834 - 837
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Distinction Between Managers and Units

• Must distinguish between the performance of the
  manager and the performance of the organizational
  sub-unit or division (what the manager can
  control)
• Company may put the strongest manager in the
  weakest division to change its fortunes
• Recognize the role of salaries and incentives in
  compensation arrangements
• Be aware of moral hazard situations where an
  employee prefers to exert less effort than the
  effort desired by the owners because the
  employees efforts cannot be accurately measured
  and monitored
• Benchmarking or relative performance evaluation
  may be used to filter out the effect of common
  uncontrollable factors

Pages 839 - 843
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Creating Incentives versus Imposing Risk

• Incentives are used to motivate employees to do
  what is best for the organization. To work well
  employees should have sufficient control.
  Success should not be based on extrinsic factors
• Risk is the probably that remuneration will vary.
  Risk is influenced by many factors, and when
  there are factors beyond the control of
  employees, remuneration should not be tied to
  those factors.

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The Management Accountants Role

• Provide technical assistance in designing the
  incentive system.
• - knowledge of the different techniques
• - understanding of the effect that organizational
  performance has on the techniques.
• - understanding of the motivational consequences
  of the techniques.
• Implement benchmarking.

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Performance Measures at the Individual Level

• Most employees have multiple roles which need to
  be considered when measuring performance.
• Team-based compensation arrangements reflect the
  need for cooperation

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Executive Compensation Packages

• Base salary
• Fringe benefits
• Annual incentives
• Long-term incentives

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Employees, Executives Act on Incentives

• Sales
• Profits
• Customer satisfaction
• Costs
• Production, output
• Making good decisions
• Ownership
• Common share performance

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Incentives With a Long-Term Job Security

• Assume salary increases over time, annual
  performance reviews, and termination for
  deficient performance.
• Employees with make the best decisions in order
  to keep from being terminated because they do not
  want to lose a valuable asset.
• Employee will not only focus on short term, but
  will also consider long term as employee will
  still be with the firm and therefore accountable

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Back-of-the-Chapter Exercises and Problems

• Exercises 24-18, Problems 24-30, 24-34

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Customer Relationship Management (CRM)

• CRM systems automate and increase the efficiency
  and effectiveness of front offices - interaction
  with customers
• Customer facing applications ensure staff on
  frontlines have easy access to customer
  histories, interactions and transactions

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CRM - Customer data warehouse

• All customer information
• From all touch points -- web, telephone, e-mail,
  face-to-face, point-of-sale
• In-bound and out-bound
• History of customer purchases

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CRMs are Important

• 1. Customers are the most valuable asset
• 2. Allows an organization to coordinate among
  touch points
• 3. The internet and information technology allow
  a greater proportion of customer interaction to
  be captured.

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CRM Software

• Examples, Siebel, Clarify
• Allow for the collection and analyze of customer
  data
• Integrate all touch points
• Determine customer spending and other patterns

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CRM examples

• Grocerygateway.com
• Amozon.com

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Analysis Practice

• Case 12, Jones Company

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Case, Web1, Brights Lodging and Travel

• The case will be reviewed in class
• After each paragraph or exhibit a student will
  identify possible issues
• Then the root issue or issues will be determined
  through analysis

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The End