Chapter 8 – Designing the Annual Management Incentive Plan
1、What are the three key roles that an effective Annual Management Incentive Plan should play? Is it a tactical or strategic device?
(a) Primary Role as a Motivator of Management Behavior
(b) Annual Incentives Represent a Variable Compensation Cost
(c) Annual Incentives Demonstrate Pay-for-Performance Linkage A properly designed annual incentive plan can assist an organization in achieving desired performance on critical tactical success factors—those success factors that can be measured and influenced within a one-year timeframe.
2、Define what is meant by “line of sight” in reference to incentive plans. In order for a management incentive plan to influence behavior, a line-of-sight relationship must exist between the participants and the plan performance measures.
Accordingly, the performance measures that determine a participant’s award should have the following key characteristics:
(1) They must be under the direct control of the participant or of a team of which the participant is a significant member,
(2) They must be achievable within a one-year timeframe.
3、What is the key difference between a profit sharing plan and Management Incentive Plan?
Occasionally you will see a profit-sharing plan masquerading as a management incentive plan. In its simplest form, a profit-sharing plan allocates a percentage of corporate or business unit earnings to plan participants. These allocated dollars are distributed to participants based on salary or a combination of salary and position level. Unlike a management incentive plan, there is a limited line-of-sight relationship for many of the plan participants, since the only performance measure is typically corporate or business unit profitability.
Also in a management incentive plan, the performance measures are not constant but will change periodically based on those tactical success factors that are most important in a given year; a profit-sharing arrangement uses the same success measure each year—earnings.
4、What two measures may be used for determining payout?
(a) Financial Measures
(b) Nonfinancial Measures
(c) Balanced Scorecard
(d) Integration with Long-Term Incentive Plans
5、What are the four criteria for determining participation?
• Start with your organization’s compensation strategy
• Assess which positions truly impact the performance measures in your plan.
• Consider the role of other organization incentive programs.
• Don’t forget the market.
Chapter 9 – Designing Incentive Compensation Programs to Support Value-Based Management
1、Define Value-Based Management.
Value-Based Management is an integrated approach to managing a business with the primary goal of maximizing long-term, sustainable value for the business’s shareholders.
It is a process that focuses on maximizing the value of investments made by suppliers’ of debt and equity funding.
It establishes an expectation that managers will operate in a manner that provides a return in excess of the cost of the debt and equity capital.
2、What do the acronyms EVA, CFROI, and EPS, EBIT, and ROI stand for?
Economic Value Added (EVA)
Cash flow return on investment (CFROI)
Earnings per share (EPS)
Earnings before interest and taxes (EBIT)
Return on investment (ROI)
3、What is the difference between Economic Profit and Net Income? Economic profit as used in this book is a simplified form of EVA, defined as:
Net Operating Profit After Taxes (NOPAT) --- a Capital Charge
This EP definition requires adjustments to both NOPAT and Capital from Generally Accepted Accounting Principles (GAAP) that are used to produce audited financial statements.
The capital charge calculation is the multiplication of “Capital” and a weighted average cost of capital (WACC). WACC represents the combined costs of debt financing and equity financing. This portion of the calculation
