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    Chapter 22 Custom Ed From 7th Ed

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    winston
    The document discusses performance measurement and compensation for multinational companies. It outlines several common financial performance measures used to evaluate employees and business units, including return on investment, residual income, economic value added, and return on sales. It also discusses defining investment and making comparisons between divisions in different countries.

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    Chapter 22 Custom Ed From 7th Ed

    Uploaded by

    winston
    9 views13 pages
    The document discusses performance measurement and compensation for multinational companies. It outlines several common financial performance measures used to evaluate employees and business units, including return on investment, residual income, economic value added, and return on sales. It also discusses defining investment and making comparisons between divisions in different countries.

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    Chapter 22 Custom Ed from 7th Ed

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    The document discusses performance measurement and compensation for multinational companies. It outlines several common financial performance measures used to evaluate employees and business units, including return on investment, residual income, economic value added, and return on sales. It also discusses defining investment and making comparisons between divisions in different countries.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    9 views13 pages

    Chapter 22 Custom Ed From 7th Ed

    Uploaded by

    winston
    The document discusses performance measurement and compensation for multinational companies. It outlines several common financial performance measures used to evaluate employees and business units, including return on investment, residual income, economic value added, and return on sales. It also discusses defining investment and making comparisons between divisions in different countries.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 13

    Bus 348

    Ch 22 – Multinational
    Performance Measurement and
    Compensation
    Performance Measures
     Employees are often assessed based on
    performance measures
     These may be:
    – Financial in nature (profitability) or
    – Non- financial (such as how efficiently tasks
    are performed)

    2
    Common Profitability Measures
     Return on Investment (ROI)
     Residual Income (RI)
     Economic Value Added (EVA)
     Return on Sales (ROS)

    3
    1. Return on Investment (ROI)
    = Income
    Investment
    Or DuPont Formula

    ROI = Asset Turnover * Profit margin

    Income = Revenues * Income


    Investment Investment Revenues

    4
    1. Return on Investment (cont)
     DuPont Formula recognizes the two
    components in profit making:-
    1. Using assets to generate more
    revenue
    2. Increasing income per $ of revenue
     Drawback of ROI – managers may not invest
    in projects that would lower their ROI, even
    though they have returns above the
    minimum requirement (Underinvestment)

    5
    2. Residual Income (RI)

    = Income – (RRR * Investment)

    Profitability is measured in $’s

    Drawback – RI is larger for larger


    investments centres.

    6
    3. Economic Value Added (EVA)
     Based on the premise that all capital
    (whether debt or equity) has a cost.

    = After tax Weighted Total Current


    operating - average * assets - Liabs
    income cost of
    capital

    7
    Weighted Average Cost of
    Capital (WACC)

    = Amount of Debt Amount of Equity


    * after tax + * return rate
    return rate

    Amount of Debt + Amount of Equity

    8
    3. Economic Value Added (EVA) -
    cont
     Cost of debt is the after tax interest
    payments on the debt
     Cost of equity is what the company’s
    shareholders could get in price
    appreciation and dividends if they invested
    in a portfolio of companies about as risky
    as that company.

    9
    4. Return on Sales (ROS)
    = Operating Income
    Sales (revenue)

    Drawback – doesn’t indicate how big the


    investment is. May cause managers to
    overinvest.

    10
    Defining Investment
     Should total assets be used?
     Total assets employed? (excluding idle
    assets)
     Should gross book value or net book
    value be used?
     Should investment in assets be valued at
    historical cost or current value?

    11
    Performance Measures to Make
    Comparisons
     The four performance measures given can
    be used for comparing responsibility
    centres to each other or to “best practice”
     If comparisons are being made, must
    ensure that the same definitions are being
    used by each company.
     Best to use a combination of performance
    measures

    12
    International Divisions
     Some companies have divisions in other countries
     To compare with Canadian divisions, need to use
    exchange rates to eliminate the effect of different
    inflation rates etc in the other countries.
     For the investment purchase, the exchange rate
    should be at the date of purchase
     For Operating income, the exchange rate should
    be the average for the year

    13

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