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1999
2002
Challenges with new system
- Board realizes that past decade "old" performance measure did not align with shareowner value: EPS grew by 9%, share prices only slightly
- Board asks for a new performance measure to
- better align manager objectives with shareholder goals
- create a more objective incentive system
- Management confusion despite repeated trainings
- No understanding of the new system some even used old system instead
- Demotivation in "Spirits": due to rezession and low profit, managers had negative balances in bonus bank
- Resulting in internal conflicts about fairness of system regarding failure due to external factors
- EP (increased) and share price (decreased) not aligned as predicted
1999
1990
2000
Anual Planning
Introduction of "Economic Profit"
1. Division transmits target to HQ
2. HQ compares Division target with EPS target
- EP = NOPAT - (Capital x Cost of Capital)
- To better match cost and benefits hence relationship of economic profit and share price
- Consultants made two adjustments to their model
- Advertising expenses capitalized and amortized in straight line over 3 years
- All goodwill amortization expense added to operating earnings
- Automatic set of annual targets (75% exceeding or falling short of last year's target) without negotiation
- Incentive system: no thresholds, no caps
- Bonus for senior managers from 20-100% of salary
- Bonus paid into bonus bank except for 25% that was paid out additional to the target bonus
3. If needed Division adjusts target to meet EPS target
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