Escolar Documentos
Profissional Documentos
Cultura Documentos
Lecture 6 Reading: Chapter 13 Financial performance measures for investment centres and reward systems
Learning outcomes
Understand the nature of investment centres Identify various performance measures to evaluate investment centres Calculate and evaluate return on investment measure Calculate and evaluate residual income measure Calculate and evaluate economic value added measure Link performance with reward to enhance goal congruence
Return on investment
Return on investment (ROI)
Used to measure the performance of an investment centre
ROI =
Return on investment
ROI: ROI = ROI = the Du Pont Perspective Margin x Turnover Net income x Sales Sales Invested capital
Du Pont provides more in-depth insights for managers to increase ROI (hence self-interest)
Return on investment
Invested capital
The assets that the investment centre has available to generate profits
Return on sales
The percentage of each sales dollar that remains as profit after all the expenses are covered
Investment turnover
The number of sales dollars generated by every dollar of invested capital
Return on investment
Improving ROI
Increase return on sales
> By increasing the selling price or sales revenue, or decreasing expenses
Actions that are taken with the sole purpose of making these ratios more favourable in the short term may have adverse effects on performance in future years
Residual income
Residual income (RI)
Asset measurement
Advantages of net book value
Consistency with balance sheet that is prepared for external reporting purposes Consistent with the definition of profit
Measuring profit
Profit margin controllable by investment centre manager Suitable when the focus is performance of the manager Encourages managers to focus on profit that they can control Motivational impact Profit margin attributable to investment centre To calculate the investment centre ROI See exhibit 13.3, p. 622
Reward systems
Processes, practices and systems which are used to provide levels of pay and benefits to employees Motivation The processes that account for an individuals intensity, direction and persistence of effort towards attaining goals Intrinsic rewards Intangible, arise from the positive experiences of being satisfied with performing well Extrinsic rewards Given to employees from an external source
Theories of motivation
Herzbergs theory of work motivation
Hygiene factors
> Provide the setting for encouraging employee motivation, but do not themselves motivate employees > Working conditions, wage levels, rules and regulations, relationships with colleagues, job security
Motivators
> Factors that relate to job content and which provide employee motivation > Achievement, recognition, the nature of the work, responsibility, opportunities for personal growth
Theories of motivation
Expectancy theory Employee motivation is a result of the strength of the relationships between expectancy, instrumentality and valence Expectancy: perception that effort will lead to a certain performance Instrumentality: perception that performance will lead to desired outcome Valance: the attractiveness of the reward Motivational theories need to be considered by managers when they are designing performance evaluation and reward systems