Topics: Mathematics, Expense, 2001 Pages: 3 (872 words) Published: October 23, 2012
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As consultant to Sanders and Myers, I would suggest they rethink the continuation of economic value added (“EVA”) bonus payout process. The proposed EVA bonus payout structure is supposed to be an objective way to gauge and reward employee performance; however, through no fault of their own, the Dermatology group is slated to undergo severe ebbs and flows in their incentive and could potentially wreak havoc on employee morale and retention. For example, in Exhibit E, we see that the dermatology group stands to receive a \$251, 451, payout as a result of a strong EVA at \$31,361, a net gain of 28,440 vs. the 2009 EVA. We would also expect to see employees bank \$131,451 in that same year. However, given the competitive encroachment by a new market entrant in 2001, that same employee group would not only not receive a bonus payout, but also lose their banked bonus and go in the hole to the tune of \$(113,685). As a result of this negative bank, this group stands to miss out on future incentives. -------------------------------------------------

EVA Calculations|
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2000| -------------------------------------------------
2001|
Net Operating Profit After Taxes| \$53,141| \$18,805|
Capital| \$198,008| \$198,259|
Cost of Capital| 11%| 11%|
EVA| \$31,361| \$(3,003)|
Bonus| \$382,903| \$(245,137)|
Payout| \$251,451| \$ -|
Bank| \$131,451| \$(113,685)|

To arrive at these numbers, the first thing I wanted to do was go back and verify the 1999 EVA to ensure I was applying the same methodology to 2000 and 2001. That included amortizing the 1995 R&D expenditures along with the other R&D expenditures as shown in Exhibits B&C. I then used the Capital Charge supplied in the case as the number for the cost of capital. -------------------------------------------------

1999...