Mr. Zaboschuk
SmC UNiversity MANAGEMENT COURSE
No Risk No Reward
EVA Compensation Tools
Paper Four:
An Analysis by Wes Zaboschuk
Compensation Strategy for the New Economy Age
How to Structure Incentive Plans that Work
Stern Stewart Research
Submitted to Dr. Juan. Cachanosky
8/25/2010
Overview of Central Theme of Articles:
Choosing a compensation plan that allows a company to encourage long-term devotion of a manager is a challenge for many companies. The advances in technology have created New Economy service driven firms that often don’t have traditional tangible assets like buildings and capital equipment. When the nature of economic output changes, the question must arise, should accounting practice be adjusted to reflect the new emergence of the service and technology economy. More importantly, how does one use compensation to entice management to make sound decisions that are not short term but that are geared towards building long-term value of for the firm? The EVA approach to measuring economic profit and its complementary compensation tools can benefit stakeholders into an integrated system that rewards employees, middle managers, executives and shareholders towards the common goal of creating value for the firm. It seems that traditional compensation systems (based on traditional accounting measures like profit, cash flow, ROI) can miss the mark on the true performance of a corporation over the long term. Stern and Steward have proposed EVA compensation systems that, in theory, should provide alignment for all stakeholders. I will now look at two influential articles and provide and analysis of the merit in using Stern and Stewart’s proposed compensation measures. How to Structure Incentive Plans That Work, Stern and Stewart
The central theme outlined in this article is to make management accountable for decisions that can be measured in the long run. The idea is that the higher the risk, the greater the reward and
No Risk No Reward
EVA Compensation Tools
Paper Four:
An Analysis by Wes Zaboschuk
Compensation Strategy for the New Economy Age
How to Structure Incentive Plans that Work
Stern Stewart Research
Submitted to Dr. Juan. Cachanosky
8/25/2010
Overview of Central Theme of Articles:
Choosing a compensation plan that allows a company to encourage long-term devotion of a manager is a challenge for many companies. The advances in technology have created New Economy service driven firms that often don’t have traditional tangible assets like buildings and capital equipment. When the nature of economic output changes, the question must arise, should accounting practice be adjusted to reflect the new emergence of the service and technology economy. More importantly, how does one use compensation to entice management to make sound decisions that are not short term but that are geared towards building long-term value of for the firm? The EVA approach to measuring economic profit and its complementary compensation tools can benefit stakeholders into an integrated system that rewards employees, middle managers, executives and shareholders towards the common goal of creating value for the firm. It seems that traditional compensation systems (based on traditional accounting measures like profit, cash flow, ROI) can miss the mark on the true performance of a corporation over the long term. Stern and Steward have proposed EVA compensation systems that, in theory, should provide alignment for all stakeholders. I will now look at two influential articles and provide and analysis of the merit in using Stern and Stewart’s proposed compensation measures. How to Structure Incentive Plans That Work, Stern and Stewart
The central theme outlined in this article is to make management accountable for decisions that can be measured in the long run. The idea is that the higher the risk, the greater the reward and
References: Canarella, G., & Gasparyan, A. (2008). New insights into executive compensation and firm performance. Managerial Finance, 34(8), 537. Ferracone, R. A., & Borneman, J. P. (2001). Putting pay for performance back into incentive programs. Compensation & Benefits Management, 17(4), 29. Hannes, S. (2007). Reverse monitoring: On the hidden role of employee stock-based compensation. Michigan Law Review, 105(7), 1421. Mason, A., (2008). Executive compensation in the new economy.Equities, 57(8), 64-66. McMullen, T., & Bremen, J. (2010). Compensation benchmarking in an irrational market. Compensation & Benefits for Law Offices, 10(3), 1-10. Safford S., (2005). The New Old Economy: Networks, Institutions, and the Organizational Transformation of American Manufacturing By Josh Whitford. New York: Oxford University Press, Book Review Stathopoulos, K., Espenlaub, S., & Walker, M. (2004). U.K. executive compensation practices: New economy versus old economy. Journal of Management Accounting Research, 16, 57-92.