When the management of the firm uses metrics, such as Economic Value Added (EVA)

Question

When the management of the firm uses metrics, such as Economic Value Added (EVA) or Value Based Management, to achieve corporate goals, these relevant value measures—or their derivatives—must be made available to all of the company employees. In “The Missing Link,” (see the attached document) the author describes the disconnect that takes place in planning if appropriate performance measures are not driven down the company structure to employees at all levels. The author makes some suggestions on how to make value-based management concepts meaningful to employees at the operation level. After reading the article, answer the following questions: 1. What is a value driver and how could it be used in compensation plans for operational employees? 2. How could a company identify value drivers for its overall Economic Value Added metrics? 3. What roles should education and reporting play in the process of using value drivers? Missing link: /content/enforced/124572-000177-01-2162-GO1-9042/Horngren_2e_reading_ch19a.docx

Explanation / Answer

1.

A value driver is a metric that contributes to overall EVA and is used by employees at the operational level. It is something that shop-level employees can control and influence. Employee performance can be based on this value driver and will increase EVA. This will give the shop-level employees a connection to EVA targets.

2.

The author suggested the concept of value mapping in identifying value drivers. Value mapping involves breaking down the components of EVA to the point at which the drivers of the value creation become relevant to the employees.

3.

To achieve the overall goals, employees at all levels must understand how the process is working and how the value driver will affect overall EVA. They need to understand how their control will be affecting the overall performance. Management has to be able to provide reporting systems to track performance on the drivers and to make metrics easy to measure and understand. If the operational employees feel disconnected from the overall EVA, they will not have the proper motivation.

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