_v quwlw xv, \\.4ww n u v u |_ I Management Control System Design Objective: You are designing an incentive system that you hope will align employee efforts with shareholder goals Financial Goal: Maximize shareholder returns Part 1: Evaluate each the following potential performance measures with respect to how well it aligns employee effort with the goal of maximizing shareholder returns. Consider the strengths and weaknesses of awarding bonuses based on the managers' level achieved of each performance measure. Evaluate each measure along four dimensions: 1) Alignment of interests between employee and shareholder (including relevant time horizon), 2) lMaximizing information about productive e'ort while minizing "noise" outside employees' control (e. g. objective, relative, subjective), 3) Ease of calculation , and 4) Ease of communication and employee understanding Utilize the following data to illustrate the evaluation of each financial performance measure (Use Labeled Tabs as templates of each Performance Measure): Status Quo Company Data (Without Potential Project): Data relating to Potential Project that could be added: Average Net Operating Assets $1.000.000 Incremental Net Operating Assets $100000 Sales Revenue $1.5 00.000 Incremental Sales Revenue $150.000 Operating Expense $1.400.000 Incremental Operating Expense $134000 Required Rate of Return 18% Management Control System Design Objective: You are designing an incentive system that you hope will align employee efforts with shareholder goals Financial Goal: Maximize shareholder returns Part 2: Using the Balanced Scorecard framework, identify two objectives and corresponding leading indicators (key performance indicators) to use as performance measures per category (excluding Financial). Discuss the potential strengths and weaknesses of each leading indicator, in terms of what productive and counterproductive behaviors each measure might motivate. Select which group(s) of employees you would assign the performance measure to. HINT: Be careful to select objectives that will lead to positive financial performance, and match them with leading indicators that can be measured. Utilize the template below to record your responses: Balanced Scorecard Category Objective Leading Indicator (performance measure) Assigned to... Productive Behavior(s) hoped (employee group) Counterproductive Behaviors the measure might motivate Financial NOT REQUIRE C ustamer Business Practice Learning & Growth A B C D E Residual Income Status Quo: Potential Project: Required Rate of Return Required Rate of Return 5 Average Net Operating Assets Average Net Operating Assets Required Return on Net Operating Assets Required Return on Net Operating Assets 8 Operating Income Operating Income Required Return on Net Operating Assets Required Return on Net Operating Assets 10 Residual Income Residual Income 2 Status Quo + Potential Project: Required Rate of Return 5 Average Net Operating Assets 6 Required Return on Net Operating Assets 17 8 Operating Income 9 Required Return on Net Operarting Assets 20 21 Residual Income 22 23 4 Evaluation: 5 Would the shareholder want the project to be accepted? Why? 6 Would the manager want to accept the project? Why? 28 1) Alignment of Interest 29 2) Signal to Noise 30 3) Ease of Calculation 4) Ease of Communication 32A B C D E Return on Investment Status Quo: Potential Project: Operating Income Operating Income Average Net Operating Assets Average Net Operating Assets Return on Investment Return on Investment Status Quo + Potential Project: 0 Operating Income 1 Average Net Operating Assets 2 3 Return on Investment 14 5 6 Evaluation: 7 Would the shareholder want the project to be accepted? Why? 8 Would the manager want to accept the project? Why? 19 20 1) Alignment of Interest 21 2) Signal to Noise 2 3) Ease of Calculation 4) Ease of Communication 24