Chapter 20 – Management Compensation, Business Analysis, and Business Valuation
The correlation measures for customer survey and wait time are used to determine the amount of the compensation sub-pool for each of
these BSC measures, as follows:
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Chapter 20 – Management Compensation, Business Analysis, and Business Valuation
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Chapter 20 – Management Compensation, Business Analysis, and Business Valuation
The bonus for each manager for earnings, survey, and wait time are as shown in TN-4 below:
TN-4: Bonus Calculations for Earnings, Customer Survey, and Wait Time
normalize the score for this measure.
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Chapter 20 – Management Compensation, Business Analysis, and Business Valuation
The sub-pool bonuses are added to determine the total bonus for each manager, shown in TN-5.
TN-5: Total Bonus for Each Manager Using the BSC Measures and Earnings
The three highest bonuses are now for stores 12, 1 and 29. Store 12 is the highest performing store as in part 2 above, because it is the most
highly ranked on all three measures, including earnings. Store 1is also again in the top 3 because of its high BSC rankings and high earnings.
Store 29 was ranked fifth in part 2 but moves up to third place for this analysis because of its relatively larger earnings in comparison to stores 21
and 10. The lowest ranking store is now store 2 due to its relatively poor performance on the BSC measures and its relatively low earnings.
4. A variety of comments and proposals are likely. Some have been suggested in the notes for parts 2 and 3 above. Some additional
points:
a. It should be useful to guide the discussion at some point to the objectives of the bonus plan. Which incentives are most
important: earnings growth, customer service, wait time, etc.? Perhaps some of the non-significant BSC measures which were
excluded in the above analysis should be included for other reasons.
b. What is the firm’s strategy, and how does the choice of a bonus plan fit that strategy? The case information indicates that
customer service is key to the company’s success, so the use of BSC measures of customer satisfaction are reasonable. Are other
BSC measures, especially operational measures, also important in creating customer satisfaction and therefore advancing the
firm’s strategy; should they be included in the bonus plan?
c. Do store managers feel that the current bonus system is fair? Would the proposed BSC-based system be perceived as more or less
fair? What amount of input, if any, should managers have for the design of the bonus plan?
d. The stores are listed in the case from oldest to newest (store 30). How should the age of the store be incorporated into the analysis,
if at all?
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Chapter 20 – Management Compensation, Business Analysis, and Business Valuation
Teaching Strategies for Readings
20-1 Using Shareholder Value to Evaluate Strategic Choices
The basic principle of the article is that performance evaluation based on accounting measures alone is not sufficient. The evaluation of a
business unit or of the unit’s manager must also consider the business unit’s performance in creating shareholder value. Based on ideas from
Alfred Rappaport’s book, Creating Shareholder Value, the article develops the measures of cash flow and market risk. An illustration for a
hypothetical firm is provided.
Discussion Questions
1. Explain the differences between the two measurement methodologies presented in the article.
A box in the article summarizes the two methodologies. One is based on economic principles and the other on accounting principles. The
2. Why is it important for firms and managers to consider shareholder value?
Firms that fail to consider shareholder value make themselves vulnerable to market forces. For example, if stock prices fall to relatively
3. What are the key factors in determining shareholder value?
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