CREATE AND SUSTAIN A CULTURE OF MAXIMIZED VALUE AND PERFORMANCE

Transcription

1 CREATE AND SUSTAIN A CULTURE OF MAXIMIZED VALUE AND PERFORMANCE WHY IS GROWING A BUSINESS AND BUILDING VALUE COMPLICATED? Competing Goals Maximize Profits 1

2 WHY IS GROWING A BUSINESS AND BUILDING VALUE COMPLICATED? Competing Goals Maximize Profits Cash Available for Taxes/Distributions WHY IS GROWING A BUSINESS AND BUILDING VALUE COMPLICATED? Competing Goals Maximize Profits Cash Available for Taxes/Distributions Grow Business 2

3 WHY IS GROWING A BUSINESS AND BUILDING VALUE COMPLICATED? Competing Goals Maximize Profits Cash Available for Taxes/Distributions Grow Business Regulatory Compliance WHY IS GROWING A BUSINESS AND BUILDING VALUE COMPLICATED? Competing Goals Maximize Profits Cash Available for Taxes/Distributions Grow Business Regulatory Compliance Attracting and Compensating Best and Brightest 3

4 WHY IS GROWING A BUSINESS AND BUILDING VALUE COMPLICATED? Competing Goals Maximize Profits Cash Available for Taxes/Distributions Grow Business Regulatory Compliance Attracting and Compensating Best and Brightest Getting All of the Key People on the Same Set of Objectives Who are Stakeholders? Stockholders Where they come from? Owners/Investors Employees Business Partners Banks/Lending Institutions Community Internal Internal External External External 4

5 Who Drives the Business Key Stakeholders? Key Stakeholders Owners/Investors Employees How Do We Get Owners and Employees to Work with the Same Attitudes and Drive to Success? Understand Success 5

6 How Do We Get Owners and Employees to Work with the Same Attitudes and Drive to Success? Understand Success Effects of Success How Do We Get Owners and Employees to Work with the Same Attitudes and Drive to Success? Understand Success Effects of Success Understand the Drivers of Success 6

7 How Do We Get Owners and Employees to Work with the Same Attitudes and Drive to Success? Understand Success Effects of Success Understand the Drivers of Success Work as one with much to gain or lose ACHIEVING A WIN/WIN WITH OWNERS/EXECUTIVE/KEY EMPLOYEES Clear Strategic Objectives 7

8 ACHIEVING A WIN/WIN WITH OWNERS/EXECUTIVE/KEY EMPLOYEES Clear Strategic Objectives Simplify the Metrics for Success ACHIEVING A WIN/WIN WITH OWNERS/EXECUTIVE/KEY EMPLOYEES Clear Strategic Objectives Simplify the Metrics for Success Put Together a Long Term Incentive Plan That Rewards Long Term Thinking 8

9 ACHIEVING A WIN/WIN WITH OWNERS/EXECUTIVE/KEY EMPLOYEES Clear Strategic Objectives Simplify the Metrics for Success Put Together a Long Term Incentive Plan That Rewards Long Term Thinking Make Key Players Partners in Success THE KEY ELEMENTS IN BUILDING VALUE 1) Expectations 2) Traditional Methods a) Profit Annually/Quarterly/Monthly EPS (Earnings Per Share) b) Project/Investment Returns c) Cash Flow d) Problem Too much emphasis on the short term Profits can be manipulated Does not take into consideration building value and long term results The Key Elements in Building Value 9

10 DEFINITIONS TO EVA NOPAT WACC Invested Capital Definitions to EVA DEFINITIONS TO EVA NOPAT Net Operating Profit After Taxes WACC Invested Capital Definitions to EVA 10

11 DEFINITIONS TO EVA NOPAT Net Operating Profit After Taxes WACC Weighted Average Cost of Capital Invested Capital Definitions to EVA DEFINITIONS TO EVA NOPAT Net Operating Profit After Taxes WACC Weighted Average Cost of Capital Invested Capital Equity & Debt Definitions to EVA 11

12 MVA = MARKET VALUE ADDED Measured by market value of the business less accumulated equity on Balance Sheet. Value of Business to others (market) Equity of Owners = Market Value Added Definitions to EVA EVA = ECONOMIC VALUE ADDED Measured in absolute dollars by taking the net Operating Profit after tax and subtracting (the cost of capital x the invested capital.) Definitions to EVA 12

13 NOPAT (Net Operating Profit After Tax) WACC x Cost of Capital (WACC=The % of Interest /Aggregate Loan Rates) EVA Calculation ($Millions) Sales $2,436 Cost of Sales 1,700 Sales General & Admin Cost 400 Taxes 134 NOPAT 202 Invested Capital 1,500 X WACC 12% Capital Charge 180 Economic Value Added 22 Definitions to EVA THE SECRETS OF VALUE CREATION Earn more than your WACC on all that you do You must earn more than what it cost to get your money Consistently grow NOPAT Investors won t pay more tomorrow for a company that is smaller Definitions to EVA 13

14 THE CONNECTION Making EVA grow makes MVA grow Over twice a powerful as making only EPS grow High EVA over time produces high MVA The Price/Book Ratio goes up Definitions to EVA UNDERSTANDING THE ELEMENTS What is WACC Weighted Average Cost of Capital All the assets you use are paid for from the right side of the balance sheet 14

15 UNDERSTANDING THE ELEMENTS The Two Sources of Money Debt and Equity UNDERSTANDING THE ELEMENTS The Cost of Equity = What Investors Could Earn by Investing Elsewhere (It s Opportunity Cost) 15

16 UNDERSTANDING THE ELEMENTS The Cost of Equity = What Investors Could Earn by Investing Elsewhere (It s Opportunity Cost) UNDERSTANDING THE ELEMENTS The Cost of Debt = The Interest on the Debt 16

17 UNDERSTANDING THE ELEMENTS The Cost of Debt = The Interest on the Debt UNDERSTANDING THE ELEMENTS WACC = The Weighted Average of the Cost of Debt and the Cost of Equity Typical WACCs: 7% to 12%. High if company is riskier. Lower if company is less risky. 17

18 THE SECRETS OF VALUE CREATION Earn More than your WAAC on all that you do You must earn more than what it costs to get your money Consistently grow NOPAT Investors won t pay more tomorrow for a company that is smaller The Secrets of Value Creation STRATEGIC PLANNING DIRECTIVES Make NOPAT go up Earn more than WACC on all that you do New Capital Projects should earn more than WACC Get rid of operations that do not earn your WACC Strategic Planning Directives 18

19 HOW IT WORKS NET OPERTING PROFIT AFTER TAXES (NOPAT) CALCULATION: Sales $25,000,000 Cost of Sales <210,000> Gross Margin $24,790,000 Total Operating Expense <$21,603,000> Income from Operations before Taxes 3,870,000 Taxes 53,000 NOPAT (Net Operating Profit After Tax) $3,817,000 INVESTED CAPITAL (IC) CALCULATION: Total Assets 26,100,000 Less: Accounts Payable <687,000> Less: Other Current Liabilities (Non Debt) <1,430,000> INVESTED CAPITAL $23,983,000 RETURN ON INVESTED CAPITAL AT END OF YEAR: NOPAT $3,817,000 Invested End of Year 23,983,000 NOPAT/IC 15.90% ECONOMIC VALUE ADDED (EVA) CALCULATION: NOPAT $3,817,000 Less Capital Charge: Invested End of Year $23,983,000 X Cost of Capital (assumed 10%) x10% Capital Charge $2,398,300 Calculated EVA (difference EVA less Capital Charge) $1,418,700 YEAR TO YEAR EFFECT BASIC ECONOMIC VALUE TARGET ANALYSIS XYZ COMPANY Actual Actual Forecast Proforma Proforma Proforma Economic Value Added 1,418,700 1,178,900 1,567,524 1,969,500 2,417,500 2,807,500 Change 338,200 <239,800> 518, , , ,000 Recommended Targets (Used Graduated Increase) 20% Growth in EVA 1,600,000 2,000,000 2,400,000 2,800,000 19

20 TAKE AWAY POINTS To Make your company worth more tomorrow: Grow NOPAT Earn more than WACC on all that you do Get rid of operations that earn less than WACC Take away points INCENTIVE PLAN Connecting the Key Stakeholders to the Concept of Growing Value Over the Long Run. 1. Shareholder/Owners Have a stake in growing business as the more it grows the more their investment is worth. 2. Key Members of Management Team a)need to know the connection between short term profits and long term growth. b)they need a long term Incentive Program that makes them partners in long term growth. c)multiyear incentive based on growth to include earnings and investment. Incentive plan 20

21 BONUS PLAN DESIGN Pay target bonuses to Key Associates if the EVA target for the year is met, and Pay more if EVA is bigger than last year Pay more if return on invested capital is greater than target return Bonus Plan Design BONUS PLAN DESIGN Bonus Plan Design Bonus Plan Design Bonus Plan Needs to be based on long term performance Reasons a)prevent Manipulated Profits b)think Strategically on Capital Purchases Unproductive Assets 21

22 DETAILS OF PLAN 1 A targeted annual ROIC is established 2 Key personnel who have the greatest impact on the decisions that affect ROIC will be invited to participate. 3 Each participant will have a bonus pool account set up in his/her name 4 Based on the target rate of Return on Invested Capital, each amount calculated on the actual return over or under will be added or reduced from the total of the Bonus Bank. Details of Plan BONUS PLAN DESIGN Target Return WACC & Risk Factor Weighted Average Cost of Capital Cost of Debt 6% Return on Investment 8% WACC = 6.7% Risk = 5.3% Target Return 12% Bonus Plan Design Bonus Plan Design 22

23 YEAR TO YEAR EFFECT XYZ Company Strategic Bonus Program Year A Year B Year B Year D Cumulative NOPAT 1,337,498 1,417,748 1,332,683 1,665,854 Invested End of Year 12,672,400 12,925,848 13,701,399 13,838,413 NOPAT/IC (Calculated) 10.6% 11.0% 9.7% 12.0% NOPAT/IC (Minimum Base) 10.0% 10.0% 10.0% 10.0% NOPAT 1,337,498 1,417,748 1,332,683 1,665,854 NOPAT/IC 10.6% 11.0% 9.7% 12.0% Dollars exceeding (under) base 70, ,163 (37,457) 282, ,977 Dollars available First dollar 70, ,000 (37,457) 100,000 20% of remainder - 5,033-36,402 Bonus Dollars Earned 70, ,033 (37,457) 136, ,236 Assumptions: 1) ROIC return on invested Capital over target: 2) ROIC Return less than target: First $100,000 into Bonus pool at Dollar for Dollar Over $100,000, 20% of each dollar into Bonus Pool, First $100,000 deducted from Bonus pool at Dollar for Dollar 20% of each dollar over $100,000 taken away from Bonus Pool 3) Percentage of participation based on each individuals base pay as a percent of all eligible participants Net Wages Earned Year A Year B Net Base Wages Percent of Bonus Pool Net Bonus Pool Dollars Bonus Carry Forward Earned Year A Dollars Total Year A Bonus Pool Net Bonus Pool Dollars Total Accumulated Year B Distribution Accumulated Distribution (1/3 Carry Forward Earned Year A Dollars (1/3 of pool) Dollars of pool) Bonus Pool Net Carry Forward Key Employees Employee A $98, % 20, , , , , , , , , B $67, % 14, , , , , , , , , C $93, % 19, , , , , , , , , D $77, % 16, , , , , , , , , E $78, % 16, , , , , , , , , F $54, % 11, , , , , , , , , TOTAL ALL $469, % 100, , ,258 56, , , ,538 72, ,692 Year C Year D Bonus Pool Dollars Earned Total Year C Bonus Pool Net Bonus Pool Dollars Total Accumulated Year C Distribution Accumulated Distribution (1/3 Carry Forward Earned Dollars (1/3 of pool) Dollars of pool) Bonus Pool Net Carry Forward Key Employees Employee A (7,861.31) 22, , , , , , , B (5,396.37) 15, , , , , , , C (7,422.36) 21, , , , , , , D (6,145.55) 17, , , , , , , E (6,293.12) 18, , , , , , , F (4,338.17) 12, , , , , , , TOTAL ALL (37,457) 108,235 36,078 72, , ,559 69, ,039 23

24 The Morey Organization ROIC Incentive Individualized Worksheet Prepared for: Employee A Percent of Bonus Dollars 21.0% ROIC Bonus Program Scenario Year A NOPAT 1,337,498 Invested End of Year 12,672,400 NOPAT/IC (Calculated) 10.55% NOPAT/IC (Minimum Base) 10.00% NOPAT 1,337,498 NOPAT/IC 10.55% Dollars exceeding (under) base 70,258 Dollars available First dollar 70,258 20% of remainder - Bonus Dollars Earned Overall 70,258 Individualized Results for A: Bonus Dollars Earned by Individual 14,745 Redistribution of 50% of monies due to new participants - Starting or Prior Year Balance carried forward 20,988 Accumulated balance 35,733 Annual distribution for 2009 Year (1/3 of accumulated balance) (11,911) Net carryforward 23,822 Overall Assumptions: 1) ROIC return on invested Capital over target: First $100,000 into Bonus pool at Dollar for Dollar Over $100,000, 20% of each dollar into Bonus Pool 2) ROIC Return less than target: First $100,000 deducted from Bonus pool at Dollar for Dollar 20% of each dollar over $100,000 taken away from Bonus Pool 3) Percentage of participation based on each individuals base pay as a percent of all eligible participants The Morey Organization ROIC Incentive Individualized Worksheet Prepared for: Employee B Projected % of 2009 Bonus Dollar Earnings for B 14.4% ROIC Bonus Program Scenario 2009 NOPAT 1,337,498 Invested End of Year 12,672,400 NOPAT/IC (Calculated) 10.55% NOPAT/IC (Minimum Base) 10.00% NOPAT 1,337,498 NOPAT/IC 10.55% Dollars exceeding (under) base 70,258 Dollars available First dollar 70,258 20% of remainder - Bonus Dollars Earned Overall 70,258 Individualized Results for B: Bonus Dollars Earned by Individual 10,122 Redistribution of 50% of monies due to new participants - Starting or Prior Year Balance carried forward 14,407 Accumulated balance 24,529 Annual distribution for 2009 Year (1/3 of accumulated balance) (8,176) Net carryforward 16,353 Overall Assumptions: 1) ROIC return on invested Capital over target: First $100,000 into Bonus pool at Dollar for Dollar Over $100,000, 20% of each dollar into Bonus Pool 2) ROIC Return less than target: First $100,000 deducted from Bonus pool at Dollar for Dollar 20% of each dollar over $100,000 taken away from Bonus Pool 3) Percentage of participation based on each individuals base pay as a percent of all eligible participants 24

25 CONCLUSION MAKE YOUR KEY PLAYERS PARTNERS IN SUCCESSFULLY GROWING THE BUSINESS QUESTIONS AND ANSWER PERIOD Conclusion THANK YOU! 25