CORRECT A way of aligning management goals to shareholder’s interest is to tie managerial compensation to the market value of the firm’s stock.…
Choosing a compensation plan that allows a company to encourage long-term devotion of a manager is a challenge for many companies. The advances in technology have created New Economy service driven firms that often don’t have traditional tangible assets like buildings and capital equipment. When the nature of economic output changes, the question must arise, should accounting practice be adjusted to reflect the new emergence of the service and technology economy. More importantly, how does one use compensation to entice management to make sound decisions that are not short term but that are geared towards building long-term value of for the firm? The EVA approach to measuring economic profit and its complementary compensation tools can benefit stakeholders into an integrated system that rewards employees, middle managers, executives and shareholders towards the common goal of creating value for the firm. It seems that traditional compensation systems (based on traditional accounting measures like profit, cash flow, ROI) can miss the mark on the true performance of a corporation over the long term. Stern and Steward have proposed EVA compensation systems that, in theory, should provide alignment for all stakeholders. I will now look at two influential articles and provide and analysis of the merit in using Stern and Stewart’s proposed compensation measures.…
Such an intense focus has been placed on quarterly earnings as an indication of a company’s success by everyone from analysts to executives that ethics have for the most part been thrown out the window, sacrificed to the all important number, i.e. earnings per share. This is the theory in Alex Berenson’s book “The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America.” This number has become part of a game to be played, a figure to be manipulated – beat the number and Wall Street all but throws a parade, miss it and a company’s stock may be abandoned. Take into account the incentives that executives have to beat the number and one can find plenty of reasons to manage earnings.…
Fligstein and Shin’s (2007) article explores the cause-effect relationship between shareholder value strategies and profitability. I believe, however, that we can go deeper and say that this relationship illustrates human nature itself and how we, as stakeholders or managers, are actually mostly the problem if we view shareholder value maximization as the path to profitability and hence success.…
with its customers. The company is in a very specific part of the retail industry but they want…
A way of aligning management goals to shareholder’s interest is to tie managerial compensation to the market value of the firm’s stock.…
It is never a good thing when managers make the mistake of putting the claims of shareholders in front of all other claims. It is true that a business corporation should try to maximize the return associated with holding its stock but at the end of the day, managers might end up obsessing on short term goals and plunge the company’s long term future. Furthermore, the managers might take actions that not only run counter to the interests of other important stakeholder groups, but also are not in the best long-term interests of shareholders themselves.…
Note: Acquisition Residual Cash Earnings (ARCE) is EBITDA + Rent + R&D Less Taxes Less Capital Charge Including Goodwill & Intangibles…
Owners’ equity is simply defined as capital that is employed in a company, which is computed by subtracting the book value of its liabilities from the book value of its assets. In this paper we will touch on three areas of importance in dealing with owners’ equity. First we will talk about why it is important to keep paid in capital separate from earned capital. Next we will look from an investor’s point of view and debate on the question of, is paid in capital more important than earned capital? Lastly again from the investors point of view we will look at the higher importance of either basic or diluted earnings per share.…
Which meaning of compensation seems most appropriate from an employee’s view: return, reward, or entitlement?…
3. Systems, The CEO should redesign the reward system to achieve the new business strategy and company goal. Every employee and team will work toward to the new business strategy and company goal to achieve their rewards. For instance, sale team they…
In the current high-stakes economic climate, consumer goods and services companies face unprecedented challenges and extreme financial pressure. Increasing competition from companies around the world creates a need for tighter linkage among strategy, performance metrics, and shareholder value creation. Intensified scrutiny from financial markets means you need to more effectively allocate capital toward opportunities that create value. Only with accurate and actionable information can you improve decision making on both short-term operational issues and long-term strategic choices. To gain control of your operations in these uncertain times, you need an effective enterprise planning approach that helps you understand the drivers of value creation within your company.…
1. It is important to perform in a manner consistent with maximizing earnings per share…
In this introduction, we will lay the foundation for this discussion by listing the three fundamental principles that underlie corporate finance—the investment, financing, and dividend principles—and the objective of firm value maximization that is at the heart of corporate financial theory.…
Shareholders have financial requirements on management’s strategic decisions, i.e. strategic investments. Those are the decisions in corporations that create value. It should therefore be obvious that those investments are the ones that should be financially evaluated - from the shareholders’ perspective.…