Bài giảng Cost Management - Chapter 20: Management Compensation, Business Analysis, and Business Valuation

Management Compensation, Business Analysis, and Business ValuationChapter TwentyMcGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.20-2Identify and explain the types of management compensationIdentify the strategic role of management compensation and the different types of compensation used in practiceExplain the three characteristics of a bonus plan: the base for determining performance, the compensation pool from which the bonus is funded, and the bonus payment optionsLearning Objectives20-3Learning Objectives (continued)Describe the role of tax planning and financial reporting in management compensation planningApply different methods for business analysis and business valuation20-4Management CompensationRecruiting, motivating, rewarding, and retaining effective managers is critical to the success of all firmsManagement compensation = policies and procedures for compensating managers; they include one or more of the following:A fixed payment (called salary)A bonus (based on the achievement of performance goals for the period)Benefits (also referred to as perks, such as travel, membership in a fitness club, medical benefits, and other extras paid for by the firm)20-5The Strategic Role of Management CompensationTop management should consider the specific strategic conditions facing the firm as a basic consideration in developing the compensation plan and making changes as strategic conditions changeTop management can manage risk aversion effectively by carefully choosing the mix of salary and bonus in total compensation There is concern that executive pay is high compared to that of lower-level employees20-6Management Compensation and the Sales Life Cycle Sales Life Cycle Phase Salary Bonus Benefits Product Introduction High Low LowGrowth Low High CompetitiveMaturity Competitive Competitive CompetitiveDecline High Low Competitive20-7The Objectives of Management Compensation ... are consistent with the three objectives of management control presented in Chapter 18:To motivate managers to exert a high level of effort to achieve the goals set by top management (bonuses)To provide the incentive for managers, acting autonomously, to make decisions consistent with the goals set by top managementTo develop fairly the rewards earned by managers for their effort and skill and the effectiveness of their decision-making20-8Bonus PlansBonus compensation is the fastest growing element of total compensation and is often the largest partBonus plans can be categorized according to three aspects:The base of compensation, that is, how the bonus pay is determinedCompensation pools, that is, the source from which the bonus pay is funded Payment options, that is, how the bonus is to be awarded20-9Base of CompensationBonus compensation can be determined on the basis of (among other bases): Stock priceStrategic performance measures (cost, revenue, profit, or investment centers)Performance measured by the balanced scorecard (CSFs)The choice of a base comes from a consideration of the compensation objectives of the firmOnce the base is chosen, the firm must choose a method for calculating the amount of the bonus based on the actual level of performance relative to the target20-10Bonus Compensation Pools Bonus compensation pools are either unit-based or firm-wide:A unit-based pool is based on the performance of the manager’s unit; the amount of the bonus for any one manager is independent of the performance of other managersA firm-wide pool contains the amount of bonus available to all managers; bonuses depend on the firm’s performance as a whole20-11Bonus Payment Options The four most common payment options are as follows:Current bonus (cash and/or stock) based on current performance—the most common form of bonus paymentDeferred bonus (cash and/or stock) earned currently but not paid for two or more yearsStock options confer the right to purchase stock at some future date at a predetermined pricePerformance shares grant stock for achieving certain performance goals over two years or more20-12Tax Planning and Financial ReportingIn addition to achieving the three main objectives of compensation plans, firms attempt to choose plans that reduce taxes for both the firm and the managerMany perks are deductible by the firm but are not considered income to the manager (e.g., club memberships, company cars, and entertainment)Firms also attempt to design compensation plans to have a favorable effect on the firm’s financial reports20-13Business AnalysisBusiness analysis includes a set of tools used to evaluate the firm’s competitiveness and financial performanceThree tools for business analysis:The balanced scorecard (BSC)Ratios to measure the performance of individual SBU managers and of the entire companyEconomic Value Added (EVA®)20-14The Balanced Scorecard (BSC)The use of the BSC to evaluate a firm is similar to the use of CSFs in evaluating and compensating an individual managerA favorable evaluation results when the CSFs are superior to the benchmarks and to prior years’ performanceFor example, assume EasyKleen, a manufacturer of cleaning products, sets its benchmark at 90% of the best performance in the industry (see next slide for company data)20-15EasyKleen Company Financial Statements20-16EasyKleen: Additional Performance DataEasyKleen has three CSFs:1) Return on total assets (financial performance)2) Number of quality defects (business processes)3) Number of training hours for plant workers (human resources)20-17BSC Performance Analysis for EasyKleen20-18Financial Ratio Analysis Financial ratio analysis uses financial statement data to evaluate performance, often in the areas of liquidity and profitability:Liquidity refers to the firm’s ability to pay its current operating expenses and maturing debt (one year or less); liquidity ratios include selected cash flow ratiosKey liquidity and cash flow measures:Accounts receivable turnoverInventory turnoverCurrent ratioQuick ratioCash-flow ratios for operating cash flows and free cash flow20-19Financial Ratio Analysis (continued)Key profitability ratios are:Gross margin percentReturn on assetsReturn on equity Earnings per share 20-20Financial Ratio Analysis for EasyKleen20-21Economic Value Added (EVA®)EVA® is a business unit’s income after taxes and after deducting the cost of capitalEVA® approximates a firm’s “economic profits”EVA® requires adjustments to financial accounting data to “correct” for accounting “distortions”EVA® focuses managers’ attention on creating value for shareholdersBy earning higher profits than the firm’s cost of capital, the firm increases its internal resources available for dividends and/or to finance its continued growthEVA® for EasyKleen Company EVA® for EasyKleen is determined as follows, with invested capital defined as total assets less current liabilities(CL)20-2220-23Business ValuationBusiness valuation examines the value of a company, to come up with a dollar amount to represent the company’s worthThe value of a business can be approached in two different waysFrom the viewpoint of the owner, shareholder, or interested investor, i.e., the value of the firm’s shareholder equityFrom the viewpoint of a potential buyer – what one would one pay to purchase the entire company--debt, equity, and assets20-24Business Valuation (continued) Four approaches to measuring the value of shareholders’ equity:The book value method is the quickest and easiest method and is equivalent to the value that appears on the balance sheet for stockholders’ equityThe market value method is the market value of the firm’s common equity, directly from the current market value of the firm’s shares (market capitalization)The discounted cash flow method measures the firm’s equity value as the discounted present value of its estimated future cash flows The multiples-based approach uses a ratio of stock price to some financial measure to determine the value of the firm’s equity20-25The Discounted Cash Flow (DCF) Method Four steps in the application of the DCF method:Forecast free cash flows (operating cash flow less capital expenditures and less dividends paid) over a finite horizon (usually 5 to 10 years)Forecast free cash flows beyond the finite horizon, using some simplifying assumption (e.g., cash flows will continue on indefinitely)Discount free cash flows at the firm’s weighted-average cost of capital (WACC)Calculate the value of equity by adding the values calculated in step 3 to current nonoperating investments and then subtracting the market value of long-term debt 20-26Using Multiples for ValuationThe multiples-based valuation uses the ratio of stock price to a key financial measure to determine a multiple that is used in valuationKey financial measures used in multiples-based valuation includeEarningsSalesCash Flow20-27Enterprise Value (EV)Enterprise value (EV) is another measure of what the market says a company is worth, but this time in an acquisitionEV is measured as the market value of the firm’s equity (market capitalization) plus debt, and less cash (cash is available after the acquisition to pay off debt or for other uses)EV is used by investors and shareholders when an acquisition is being considered20-28Compensation plans are policies and procedures for compensating managersA salary is a fixed (usually monthly) paymentA bonus is based on the achievement of performance goals for the periodBenefits (also referred to as perks) include travel, membership in a fitness club, medical benefits, and other extras paid for by the firmIn addition to achieving the three main objectives, firms attempt to choose compensation plans that reduce or avoid taxes for both the firm and the managerChapter SummaryChapter Summary (continued)A wide variety of bonus plans exists, but can be categorized according to three aspects: The base of compensation, that is, how the bonus pay is determined (e.g., stock price, strategic performance measures (cost, revenue, profit, or investment center), or the balanced scorecard (CSFs)) Compensation pools, that is, the source from which the bonus pay is funded (unit-based or firm-wide) Payment options, that is, how the bonus is to be awarded 20-29Chapter Summary (continued)In recent years, the use of different payment options for bonus compensation plans has greatly increased, but the four most common payment options are as follows: Current bonus (cash and/or stock) based on current performance - most common form Deferred bonus (cash and/or stock) earned currently but not paid for two or more years Stock options confer the right to purchase stock at some future date at a predetermined price Performance shares grant stock for achieving certain performance goals over two years or more20-30Chapter Summary (continued) Business analysis includes a set of tools used to evaluate the firm’s competitiveness and financial performance There are three tools for business analysis: The balanced scorecard (BSC) Financial Ratios to measure the performance of individual SBU managers and of the entire company Economic Value Added (EVA®)20-31Chapter Summary (continued) Business valuation examines the value of a company, to come up with a single dollar figure of worth There are four approaches to equity valuation The book value method The market value method (market capitalization) The discounted cash flow method The multiples-based approach Enterprise value (EV) is a measure of what the market says a company is worth for acquisition purposes20-32Compensation, Business Analysis, and Business Valuation: Unlocking the Company’s Future20-33