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Essay / Research Paper Abstract
A 3 page paper discussing the problems presented in Harvard Case 9-101-019. Senior management has implemented its Economic Value Added (EVA) management incentive program designed to allow managers to profit from sound decisions made for the long term, rather than focusing only on the results of the current quarter. Several difficulties arose, however, to make EVA a threat to managers’ motivation for several years into the future. The paper suggests an alternative that allows the company to retain the EVA program while building greater organizational cohesiveness. Bibliography lists 1 source.
Page Count:
3 pages (~225 words per page)
File: CC6_KSmgmtVyad.rtf
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Unformatted sample text from the term paper:
lasting, long-term view of decisions made on behalf of the company, Vyaderm Pharmaceuticals. The newly-retired CEO had build an atmosphere of "making the numbers" each quarter, regardless of conditions
that existed at any given time. This is a common affliction among publicly traded companies, for it is the quarterly results that Wall Street analysts are so enamored of
when assessing the performance of any company. The former CEO believed that maintaining shareholder value to be the primary goal, and in fact that is the case. The
new CEO, however, realized that the structure under which Vyaderm had been protecting shareholder value was shortsighted and over the long term could work against the companys ability to build
for the future (Reinbergs and Simons, 2000). New CEO Maurice Vedrines devised an incentive compensation plan intended to allow managers to make decisions based on long-term effects rather than
on quarterly results and now needs to assess the wisdom of making exception during the first year of the program. The EVA Program
EVA - Economic Value Added - was to be a measure of realized results maintained over the long term, meaning from year to year. Calculated on the basis of
EVA = Net Operating Profit after Taxes - [Capital x Cost of Capital] This approach was intended to encourage managers to look
beyond the effects of the current quarter and to pursue "only investments with a positive economic return" (Reinbergs and Simons, 2000; p. 2). EVA was intended to provide unlimited
bonus potential to managers; a "bonus bank ensured that EVA improvements were sustained over time before awards were fully paid out" (Reinbergs and Simons, 2000; p. 4). Two significant
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