Old exams Flashcards
a) The criticism of accounting-based measures has resulted in a number of new (improved) financial
measures. Describe what characterize these new financial measures.
- Value Based Measures (VBM) – generic term for a number of supply-side driven management accounting constructs based on financial theory – i.e. derived from deductive/armchair research
- Informed by agency theory – people/agents are driven by their self-interest
- Focuses on the creation and measurement of shareholder value – seen as the key aspect for “success”
- Cash is preferable to profit
- Exceeding the cost of capital
- Managing both long and short-term perspectives
- Eliminate distortions in accounting data – Provide measures that are comparable over time and organizations
- Number of inputs are many in the shareholder value measures
- Shareholder value is a function of future cash flows discounted for risk
- Criticizes accounting-based valuation and measurement principles
- Measures are influenced by all decisions made by managers within the firm
b) Decision-makers in firms often tend to focus more on financial performance measures rather than non-financial performance measures. Why?
for example Ittner D. (2008), Kraus, K. & Lind, J. (2010)
- Lack of simplicity and comparability (non-financial measures)
- Technical factors (choice of measures, setting targets, weighting measures)
- Organizational resistance (management commitments and organizational resistance)
- Capital market pressure
- Framing
- Endowment effects and status-quo
- Short-termism
- Confirmation bias and sunk costs
b) With reference to Venanzi D. (2010). “Financial Performance Measures and Value Creation: A Review”, in what way do the new financial measures add value? (3p)
The “new” financial measures are EVA (Economic Value Added), CFROI (CashFlow Return on Investment), SVA (Shareholder Value Added). Preferred over the accounting based, but these newer ones are more complexed which makes them harder to use.
* The measures are better predictors of stock returns (However, research findings are inconclusive.)
* They generate greater awareness of cost of capital
* They focus on value creation in the long run (Both long- and short-term perspective)
* Eliminate distortions in accounting data making it comparable over time and between organizations
EVA = NOPAT - (Capital invested * WACC)
* Measures income in relation to cost of capital
* Absolute measure
* Simple indicator
* Related to NPV (Net Present Value)
* “Accounting based”
* Very complexed measure for control purposes
* Dependent on accounting measures of operating income and invested capital
* Restricted to one year (calculates how much value an investment adds to the business for one year (each financial year) )
CFROI = (Gross Cash Flow – Economic Depreciation) / Gross Investment
* Focuses on Cash Flows
* Avoids accounting distortions
* Better measure than ROI because it focus on gross investment
* Related to IRR (Internal Rate of Return) (CFROI includes sunk costs. IRR includes only future cash flows)
* Accounting based
* Rate based measure - does not measure change in value
* Less useful for corporate planning
* Does not focus on future growth
* Complex measure
SVA = Gross corporate value – The market value of debt
* Avoids accounting distortions
* Measures change in value
* Focuses on future cash flows
* More appropriate for corporate planning
* Related to NPV (Net present Value)
* Use a DCF (discontinued cash flow) computation
* Subjective approach (judgement about factors (cash flow) into the future)
* Has shortcommings as compensation system compared to EVA
* Complex - Number of inputs can be many
Axfood is a leading food retail group in Sweden with subsidiaries corresponding to distinctive food concepts. Sustainability is an important aspect of Axfood’s vision and mission. The group manages and monitors operations based on a set of goals, KPIs and strategic targets, in part tied to a number of the UN’s Sustainable Development Goals. Goals, KPIs and targets (the PMS) are set by a team made up of top level executives and subsidiary presidents.
a) In 2019, a new performance target related to sustainability were formulated: The share of sustainability-labelled products as a percentage of the Axfood Group’s stores sales should be at least 30% by year 2025.Is the target SMART? Motivate your answer.
S- pecific
M- easureble
A- chievable/attainable (or assignable)
R- elevant (or realistic)
T- ime-bound
Doran (1985)
Discuss how it achives these five (six) different aspects
You should understand the meaning of each of the five
components of the framework and also how they are interrelated.
There is potentially a ”dark side” when it comes to extrinsic incentives. Give two different examples (e.g. taken from the course literature or your own). For each example, explain shortly the mechanism behind it with reference to determinants of motivation.
-
”Hidden cost of reward” (e.g. crowding out)
* Intrinsic motivation substituted by extrinsic motivation (crowding out) -
”Hidden cost of control” (e.g. negative signal effect)
* Direct control have negative signal effect due to feelings of distrust and reduced autonomy -
Reciprocity
* Retaliation against managers with ”bad intentions” (not paying respect, being unfair)
Examples
#1: Higher salary or promotion
#2: Hierarchy and daily controls and justification
#3: Reducing or even stopping to work in the interest of the firm
The board of directors have suggested use of direct financial incentives to increase staff motivation. Given uncertainty and the complex work performed by the staff, you (being the CEO) are worried.
You remember from your master program that uncertainty and type of task is important contingency factors that should influence both use of controls (think Simons LOC and coercive/enabling) as well as the design of targets and incentives. Explain how and why.
(ja kör hårt - yes drive hard)
Incentives should match the type of motivation! (financial incentives vs uncertainty) -> therefore constant feedback and autonomy.
SIMONS:
Beliefs system
Boundary system
Diagnostic control system
Interactive control system
Coercive: stereotypical top-down control approach that
emphasizes centralization and preplanning
Enabling: seeks to put employees in a position to deal directly with the inevitable contingencies in their work
Design of targets:
Influences the long-term employee workflow and development.
- Type of targets?
- For planning or motivation?
- Historically based targets?
- Negotiated targets?
- External targets?
Design of incentives:
- financial
- non-financial
- financial & non-financial
- individual, team or corporate levels
