GROUP:1M.FAISAL HAYAT

M.ABDUL REHMAN

Duckworth Industries,Inc-Incentive Compensation

Programs

Introduction

Brief Introduction of Mr. John Duckworth

Background of Duckworth industries

Duckworth incentive Plan

For Plant level Employees Attendance Bonus:60 cent per hour pay

increase if a employee was never more than 2 min late.

Plant level Employees up to shift supervisors Quality Incentive plan Profit sharing PlanAll employee were participating in it. Profit

sharing pool was created and each employee was getting the share as per their wages or salaries.

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Sales and supervisory Personnel had individual incentive plans.

10-40% of base pay

Existing Senior Management Incentive Plans

These incentive plans went through significant changes throughout time period from 1983-1992

Prior 90’s each manager was getting a bonus of 20%-50% of their base salary.

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Basis of performance measures were:Cash flows

Sales Growth of proprietary products

Inventory turns

Account Receivables

Gross margins

Special individual projects

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Matrix was built to measure sales and profitability growth: Exhibit 6

Annual goals for each business were set which were determined by performance level of various peer group companies: Exibit:7

plan covered dozens of senior managers till 1992Phantom stock plan was introduced i.e. increase

in value of per share at the end of 5 years.After 92 there was need for new Incentive

system as there were some operational problem were arising.

A Proposed New EVA Incentive System

What is EVA?

Economic Value Added (EVA) is a measure of financial performance based on the concept that all capital has a cost and that earning more than the cost of capital creates value for shareholders. It is after-tax net operating profit (NOPAT) minus a capital charge. It is true economic profit consisting of all costs including the cost of capital. If a company’s return on capital exceeds its cost of capital it is creating true value for the shareholder.

Objective of this new System

To Align closely the interests of managers and the share holders

To provide a self adjusting mechanism

Logic Behind EVA Calculation

• EVA for a particular year is the product of:I. Average capital during the year andII. The spread separating Cost of

Capital(CoC) and Return on capital (RoC) during the year

• By this formula management of each Unit

can separately compensated for the EVA.

Key Drivers of EVA

Net Operating Profit after taxes (NOPAT) Revenue – Cost of Sales - SG&A – Cash

taxesAverage CapitalCost of Capital

Mechanism of Calculating Executive Compensation

• A target Bonus was established which was 37% of the base pay. Bonus Units like phantom stock would be assigned to each manager in an amount such that if the bonus unit was valued at $1.00

• A baseline EVA was established. At the end of each year the base line EVA would change by one–half the difference between actual EVA and Base line EVA for the previous year.

A base unit value was established for each ensuring year. If EVA hit exactly the baseline EVA each year, and base unit value was set at $1.00, then exactly the target bonus would be earned each year

A bonus sensitivity factor was established

Advantages of EVA compensation system

It addressed both Long term and Short term compensation plansIt aligned the interest of the managers and

the shareholdersIt was self Adjusting compensation system