高级管理会计advanced management accounting课件8 performance measurement and compensation

LESSON 8Performance measurement and compensation,,Contents,,,TOPIC 8.1Financial and nonfinancial performance measures,Performance measurement systems are a critical component of a companys management control system. Performance measurement provides the feedback loop that management uses to evaluate the effectiveness and efficiency of corporate and business-level strategies.Performance measurement is a tool that management uses to evaluate subunits, and that the board of directors uses to determine senior management bonuses and compensation. Effective management control systems also promote effective management behaviour and encourage alignment with organizational goals.,,Many organizations are now supplementing traditional financial-based measuresThe Balanced Scorecards customer, internal business, and learning and growth perspectives use nonfinancial measures, which are needed by companies whose business success depends upon nonfinancial, as well as financial measures,,TOPIC 8.2Accounting-based performance measures,,Requires a six-step design process:Choose Performance Measures that align with top managements financial goalsChoose the time horizon of each Performance MeasureChoose a definition of the components in each Performance MeasureChoose a measurement alternative for each Performance MeasureChoose a target level of performanceChoose the timing of feedback,,TOPIC 8.3Responsibility centers and performance measures,,In evaluating individual management and responsibility centres (Lesson 6), managers consider each segment or subunit separately. Total costs can be subdivided into variable costs and fixed costs; fixed costs can be further subdivided into those that are controllable and those that are not controllable by a manager. In addition, some costs are considered to be common costs and cannot be traced to a specific subunit.,,EXAMPLE 8.1,,TOPIC 8.4Return on investment, residual income, and economic value added,,Many performance measures have been used to evaluate organizational and management Performance.Effective measures meet the criteria of goal congruence, evaluation of management effort, and manager autonomyThe measures that include investment in evaluating performance are return on investment (ROI), residual income (RI), economic value added (EVA), and return on sales (ROS).,,Return on investment(ROI),ROI is an accounting measure of income divided by an accounting measure of investment,,,ROI may be decomposed into its two components as follows:ROI = Return on Sales X Investment TurnoverThis is known as the DuPont Method of Profitability Analysis,Here is the rationale behind this formulation: With the same profit margin, the higher the turnover, the higher the ROI. With the same turnover, the higher the margin, the higher the ROI. The return on investment becomes even higher if both factors are increasing.,,ROI ROA ROEThere are at least two ways of determining investment for performance measurement. Investment can be total assets or it can be total assets less current liabilities.Income can be defined as net income or operating income,,EXHIBIT 8-2,Calculating return-on-investment income, which is based on accounting income, allows management to manipulate the financial statements through accounting policy choices.Further, a division manager could decide not to reinvest in new assets (assets will decline due to amortization, all else being equal), which could increase return on investment at the expense of investing in equipment upgrades, research and development, and so on.,,Residual income,RI = Actual income Capital charge= Actual income (Cost of capital Invested capital)The “capital charge” precisely measures this shareholders opportunity cost and uses invested required rate of return as a surrogate(代理变量) for the opportunity cost.This required rate of return is the weighted average cost of capital (WACC), or the rate of return that the firm must pay the market to raise capital.,,EXHIBIT 8-3,,Economic Value Added (EVA),EVA is a specific type of residual income calculation that has recently gained popularity,,EXAMPLE 8.2,After-tax operating profit(NOPAT) should be adjusted from income or profit. That means ,we should add back some items, for example, R&D,Goodwill,and so on. The reason is that they will generate benefits in the long-run, but they are treated with expense in accounting according to GAAP.Weighted-average costs of capital is overall cost of capital, including liability and equity. when we calculate ,we also should use the market value not book value.,,Return on sales,ROS = Operating income Revenues,,Is any one method better than the others for measuring performance? No. because each evaluates a different aspect of performance.ROS measures how effectively costs are managed. To evaluate overall aggregate performance ,ROI ,RI or EVA measures are more appropriate than ROS because they consider both income and investment.ROI indicates which investment yields the highest return. RI and EVA measures overcome some of the goal-congruence problems of ROI.,,Some managers favor EVA because it explicitly considers tax effects while (pretax) RI measures do not. Other managers favor (pretax)RI because it is easier to calculate and because ,in most cases, it leads to the same conclusion as EVA. Genarally,companies use multiple financial measures to evaluate performance.,,TOPIC 8.5Time horizon of performance measures,,Multiple periods of evaluation are sometimes appropriateROI, RI, EVA and ROS all basically evaluate one period of timeROI, RI, EVA and ROS may all be adapted to evaluate multiple periods of timeTextbook P832,,TOPIC 8.6Alternative measurements of investment,,When considering the investment component in the calculations of ROI, RI, and EVA, a number of alternatives can be used: Total assets available all business assets, regardless of intended purpose Total assets employed total assets less idle assets and assets purchased for further expansion (for example, land held for future expansion) Working capital (current assets less current liabilities) plus long-term assets excludes current assets financed by short-term creditors Shareholders equity total assets less total liabilities Capital assets employed shareholders equity plus long-term liabilities,,Choosing Measurement Alternatives for Performance Measures,Possible alternative definitions of cost:Current CostGross Value of AssetsNet Book Value of AssetsThere are two types of agency costs here. One is shirking: managers can appear to be successful while applying little effort to their decisions. The other is lost profitability in the long run, a residual loss borne by shareholders, especially if technology in a particular industry is changing.,,TOPIC 8.7Targeted levels of performance,,Historically driven targets used to set target goalsGoal may include a Continuous Improvement component,,TOPIC 8.8Global performance measurement,,Additional Difficulties faced by Multinational Companies:The economic, legal, political, social, and cultural environments differ significantly across countriesGovernments in some countries may impose controls and limit selling prices of a companys productsAvailability of materials and skilled labor, as well as costs of materials, labor, and infrastructure may differ across countriesDivisions operating in different countries account for their performance in different currencies,,EXAMPLE 8.3,TOPIC 8.9Evaluation of managers and organizational units under performanceevaluation,,The performance evaluation of a manager should be distinguished from the performance evaluation of that managers subunit, such as a division of the companyManagement compensation is also tied to subunit performance, and a subunits performance evaluation can be tied to the evaluation of its managers.,,When compensation is based on salary plus performance-based measures, there is a tradeoff between creating incentives and imposing risksInformation asymmetry then becomes a problem for ownerRisk-averse managers may alter their behaviour to reduce risk, thereby not taking on projects that could be in the best interest of owners. In such situations, owners can use multiple performance measures to mitigate some of the risks,,In some cases, especially when economic conditions or outside events have an impact onperformance, owners may also use relative performance measures to benchmark operations and managers.,,TOPIC 8.10Activity-level performance measures,,Most employees have multifaceted jobs, which can have more than a direct financial impact on the organizationmanagers can use multiple measures suchas a Balanced ScorecardTwo issues when evaluating performance at the individual activity level:Designing performance measures for activities that require multiple tasksDesigning performance measures for activities done in teams,,TOPIC 8.11Executive performance measures and compensation,,Executive compensation packages are often a combination of salary, annual incentives (cash bonus), long-term incentives (stock options), and fringe benefits. Management compensation packages should enhance achievement of organizational goals be straightforward to administer be viewed as fair by all stakeholders,,A well-designed plan mixes both short-term and long-term goals, and balances the riskrewardtradeoff. Most companies use a combination of net income or ROI, RI, and EVA to focus managers attention on achieving short-term goals.Stock options, based on share price, reflect long-term goals,,TOPIC 8.12Performance measures and fraud,,Executive compensation packages that are linked to performance may provide incentive form managers to inflate net income figures for their own financial gain (for example, in the short term, through manipulation of accounting accruals). It is more difficult to manipulate net income in the long-run, however, because of the iron law of reversal of accruals.,,Information asymmetry is p