What are the three steps in designing accounting-based performance measures?
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Describe two disclosures required by the SEC with respect to executive compensation.
John Mendenhall seeks your advice on revising the existing bonus plan for division managers of News Report Group. Assume division managers do not like bearing risk. Mendenhall is considering three ideas: . Make each division manager's compensation depend on division Rl. . Make each division manager's compensation depend on company-wide Rl. . Use benchmarking and compensate division managers on the basis of their division's RI minus the RII of the ether division. 1\. Evaluate the three ideas Mendenhall has put forth using performance- evaluation concepts described in this chapter. Indicate the positive and negative features of each proposal. 2\. Mendenhall is concerned that the pressure for short-run performance may cause managers to cut corners. What systems might Mendenhall introduce to avoid this problem? Explain briefly. 3\. Mendenhall is also concerned that the pressure for short-run performance might cause managers to ignore emerging threats and opportunities. What system might Mendenhall introduce to prevent this problem? Explain briefly.
Cora Manufacturing makes fashion products and competes on the basis of quality and leading-edge designs. The company has two divisions, clothing and cosmetics. Cora has \(\$ 5,000,000\) invested in assets in its clothing division. After-tax operating income from sales of clothing this year is $\$ 1,000,000\(. The cosmetics division has \)\$ 12,500,000$ invested in assets and an after-tax operating income this year of \(\$ 2,000,000\). The weighted- average cost of capital for Cora is \(6 \%\) The CEO of Cora has told the manager of each division that the division that "performs best" this year will get a bonus. 1\. Calculate the ROI and residual income for each division of Cora Manufacturing, and briefly explain which manager will get the bonus. What are the advantages and disadvantages of each measure? 2\. The CEO of Cora Manufacturing has recently heard of another measure similar to residual income called EVA. The CEO has the accountant calculate adjusted incomes for clothing and cosmetics and finds that the adjusted after- tax operating incomes are \(\$ 634,200\) and \(\$ 2,181,600,\) respectively. Also, the clothing division has \(\$ 470,000\) of current liabilities, while the cosmetics division has only \(\$ 380,000\) of current liabilities. Using the preceding information, calculate the EVA for each division and discuss which manager will get the bonus. 3\. What nonfinancial measures could Cora use to evaluate divisional performances?
ROI, RI, EVA. Hamilton Corp. is a reinsurance and financial services company. Hamilton strongly believes in evaluating the performance of its stand-alone divisions using financial metrics such as R0l and residual income. For the year ended December \(31,2017,\) Hamilton's CF0 received the following information about the performance of the property/casualty division: For the purposes of divisional performance evaluation, Hamilton defines investment as total assets and income as operating income (that is, income before interest and taxes). The firm pays a flat rate of \(25 \%\) in taxes on its income. 1\. What was the net income after taxes of the property/casualty division? 2\. What was the division's ROI for the year? 3\. Based on Hamilton's required rate of return of \(8 \%\), what was the property/casualty division's residual income for \(2017 ?\) 4\. Hamilton's CF0 has heard about EVA and is curious about whether it might be a better measure to use for evaluating division managers. Hamilton's four divisions have similar risk characteristics. Hamilton's debt trades at book value while its equity has a market value approximately \(150 \%\) that of its book value. The company's cost of equity capital is \(10 \%\). Calculate each of the following components of EVA for the property/casualty division, as well as the final EVA figure: a. Net operating profit after taxes b. Weighted-average cost of capital c. Investment, as measured for EVA calculations
Why is it important to distinguish between the performance of a manager and the performance of the organization subunit for which the manager is responsible? Give an example.
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