Value Based Management Incentive Program

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Value Based Management Incentive Program

In the recent years, organizations have put emphasis on high quality of management by investing in a vast number of new management approaches such as total quality management, empowerment, flat organizations and value based management incentive programs among others. These plethora of management approaches have given good results so far. The value based management believes that performance measurement, integration of the strategic plans and compensation is the key to increasing the shareholder value. It is due to the importance the program places on the compensation that the incentives awarded to the management are cohesively vital in ensuring the success of an organization. The name of the company which needs to implement the value based management incentive program is Avec Auditors. The company is involved in auditing other firms, fund management, investment and has a team of financial experts that give financial advice to customers that need it.

The first step that needs to be taken is to designing a balance scorecard for the staff to be awarded incentives. The balance scorecard is a structured report that can be used by the human resource department or the supervisors of an employee to monitor the staff’s activities and keep track of their action’s consequences. The balance scorecard should focus on the organization’s strategic agenda. Performance contracts should also be signed to establish an agreement between the employer and the employee on the targets that employee is supposed to achieve. These two activities would help in the value based management incentive in that the incentives awarded will be based on the effects of their actions and how much their targets were surpassed. The balance scorecard would outline the value of the business that the employee brought to the organization while the performance contract would be used to see how much the employee surpassed his targets.

Since people are always skeptical about new programs, the company should begin with a pilot study. The pilot study will involve a few of the employees and it is meant to see the effectiveness of the value based management incentive program. The pilot study should start at the corporate level then later on push down to the business units in the organization. The pilot study, if successful, will help overcome objections. The company will be careful in choosing the business units it will use for the pilot study. The study needs quick results hence the business units chosen should relate. The implementation will only work better if the stakeholders are contented with the results. The sufficient implementation and education should not take too long as the longer it takes the more likely it is for people to lose enthusiasm in the project. It should take about a year.

The step action should be a company-wide rollout. Once the results of the pilot study have been discussed and they prove to be viable and the entire team is on board, the rollout of the value based management incentive program should take place. This program is very attractive to the capital intensive companies as opposed to service intensive companies. Since Avec Auditors is a capital intensive firm, the projects seems to be very lucrative. The program is also more lucrative to newer firms than old firms and thus more likely to succeed in this firm as the firm is only two years old. The employee’s compensation will be tied to their metrics. The last step would be to observe the success of this new program. See how it has benefited the firm since its inception and if its continued use would help the firm or we are better off without it.

Wallmart has grown to be the world’s largest retailer. The retail firm recently employed the use of value based management incentive program. You would know if a program has hit mainstream if Wallmart is spotted trying to use it.

Southeast Airlines is another example of an organization that uses value based management program. The organization compensates their staff based on their merit. This organization together with Wallmart is an example of those that have successfully employed the use of value based management incentive.

In summary, in order to implement a value based management program the company will design balance scorecards and performance contracts, conduct a pilot study then a company-wide rollout followed by a follow up on the implications of the value based management incentive program.

References:

Young, S. D., & O&Byrne, S. F. (2001). EVA® and value-based management. New York: McGraw-Hill.

Ittner, C. D., & Larcker, D. F. (2001). Assessing empirical research in managerial accounting: a value-based management perspective. Journal of accounting and economics, 32(1), 349-410.

Martin, J. D., & Petty, J. W. (2001). Value based management: The corporate response to the shareholder revolution. Oxford University Press.