Financial Management of eBay Company - Assignment Example

- List as many objectives as you can, explicit or implicit, that you have observed or suspect exist in this organisation. Categorise these as either financial objectives or non-financial objectives. Financial objectives Ebay Marketplace entering into new in-season product markets and monetizing classifieds platforms, with long-term non-GAAP operating margins for that business expected to range between 35 and 40% Paypal with long-term non-GAAP operating margins expected to range between 20 and 25% long-term non-GAAP operating margins for Skype are also expected to range between 20 and 25% expand overall non-GAAP operating margins above the 33% Non-financial objectives increasing the number of newly registered users on the eBay Marketplace increasing the number of registered users that become active bidders, buyers or sellers on the eBay Marketplace increasing the volume and value of transactions that are conducted by each active user on our eBay Marketplace. Survival Creating an ever-expanding empire (Acquisition of PayPal, Skype etc) Maximisation of profit Maximisation of long-term shareholder value Employee welfare Management welfare / Remuneration Impact on society Service provision Responsibilities to customers and suppliers Growth Diversification Research and Development Innovation Maintaining a contented workforce Quality of Service Environmental Issues Legislation Social Conscience Self Interest - Discuss in detail three financial and three non-financial objectives from your list. Expand overall non-GAAP operating margins above the 33% Ebay aims to improve its overall operating margins above 33%, which is a combination of increasing the sales price through the auctions, and lowering the operating costs. Ebay Marketplace entering into new in-season product markets and monetizing classifieds platforms, with long-term non-GAAP operating margins for that business expected to range between 35 and 40% By constantly finding new revenue sources such as classified platforms and venturing into in-season product markets, this is an objective that aims to support the objective of getting an overall operating margin above 33%. Paypal with long-term non-GAAP operating margins expected to range between 20 and 25% This objective is also in line with the overall objective of achieving above 33% profit margin for the company. While this is lower than the overall objective, Paypal is expected to generate a good deal of revenues for the company which will contribute to the operating profit margin. Increasing the volume and value of transactions that are conducted by each active user on our eBay Marketplace One of the company's strategic business units is Ebay Marketplace-actually the core among its businesses. Ebay aims to increase the volume of transactions that are conducted by users as part of its operational objective. By increasing the per-transaction value, as well as its volume, Ebay aims to increase its overall objective of increasing operating profit margin. Maintaining a contented workforce Ebay's human resource policy includes creating a good and friendly environment for its company, where employees will always have an environment which will be human at all times. This include activities that aim to provide services for employees' convenience including a gym, restaurant, coffee shop and relaxation rooms, as well as family events for special holidays and occasions. Management welfare / Remuneration Apart from ordinary employees, managers in Ebay are given bonuses and economic benefits as part of their renumeration, as regards the company's human resource policies. By including bonuses and other economic benefits to people who hold top positions in the company, the company aims to improve accountability and lessen the agency costs-with top managers as the agency to the shareholders. - Consider the extent to which these objectives are in conflict with each other. On one hand, the company aims to improve its operating profit margin. On the other hand, costs that are related to increasing the costs that cut down operating profit margin are associated with fulfilling of the non-financial objectives. The conflict arises due to the differences in interests that the objectives try to serve and fulfill. First, the other non-financial objective that is related to its operations aims to "increase the volume and value of transactions that are conducted by each active user in EBay Marketplace." If a corporation aims to increase its operating profit margin, it is usual that the volume has to be sacrificed. As the costs associated to added volume increases as sales volume increases, the gross profit margin itself diminishes, therefore leaving little to the operating profit margin. In contrast to volume, if Ebay aims to increase its operating profit margin, it can focus less on building volume, but on concentrating prices on auctions. Two objectives for sales itself is not good for an organization. The other two objectives that pertain to human resource policies represent additional costs to operating expenses. These therefore lower the operating profit margin. Although the company does not elaborate on the strategy for human resource, such objectives entail costs that are related to the operating profit margin. In this case, these non-financial objectives are in conflict with the financial ones. - Try to identify any steps the organisation takes to attempt to achieve goal congruence between the different stakeholders involved. Ebay, in its list of objectives include maximization of long-term shareholder value. However, the closest that Ebay has done in order to keep the goals of the stakeholders aligned is to provide and honest and friendly environment for its workforce. By at least providing good working environment, and building accountability among managers and stakeholders for their decisions, the company wants its employees to act like they own it. Ebay provides its managers with compensation packages that include bonuses and other economic benefits. Such policy at the very least aligns the goals of the company to those of the people with managerial positions in the company. - Make recommendations as to how the efforts of all individuals in the organisation could be channeled more effectively. Recommendation: Linking pay to performance On linking pay to performance, the major issue is how to measure reward. In the course of the situation where a performance is gauged through a target, which with increase or decrease will determine the performance, rewards or the incentive pay would be set against it. However, this leads to encourage managers to commit to unethical behaviors in order to determine how to "polish results" in deviation from the target to receive rewards that are in line with their personal interests, rather than the shareholders'. Alternative to link pay for performance: "Design bonus plans with 'linear' pay-performance relations" A "linear" pay-performance scheme emphasizes that what has been the actual performance, will determine the actual pay. This alternative suggests that while having an actual target from which the deviation will be gauged to determine performance encourages managers to "polish results", what the manager achieves, whether he/she falls or exceeds the target will determine his incentive pay, according to actual performance. This alternative encourages the managers to achieve a certain level of performance if he/she wants a certain level of incentive pay. This seems to make more sense when looked at from a shareholders' perspective: the more a manager wants to increase his/her base pay, the harder he/she has to work to improving the shareholders' wealth or other performance metrics that gauge its performance. Since a manager's performance is no longer determined by deviation from the target, the linear pay-performance scheme does not promote unethical behavior while the manager's interest is kept in line with those of the shareholders'. The pay structure that comprises both the fixed and variable components, namely base pay, incentive pay in the form of commissions, bonus pay and long term compensation balances the need between that of the company and an individual. On the company's side, performance in the form of meeting targets and objectives is crucial. On the individual's side, rewards as motivators to meet the targets are designed and incorporated in the compensation. This gives a win-win situation for the company and the individual. By linking pay to performance in the form of the different sets of packages, rewards are given when employees meet the objective. This is drawn from the expectancy theory and reinforcement theory of human resource management. With the reinforcement theory, when a behavior is rewarded, it is more likely is done again in the future; thus making the compensation a motivator to employee. The expectancy theory backs up this compensation policy or pay system in that the expected rewards become motivators to employees to increase performance. Apart from this, the sort of compensation structure addresses the issues of agency costs-when employees or managers actions are not beneficial to the principal or the owners. By making employees part owners of the companies, they are expected to put the interest of the shareholders when they act. By putting the goals of individual employees in line with the goals of the firm as a whole for the shareholders, agency costs are minimized. Because employees are given compensation in the form of base pay to give them security, the incentive pay aims to balance the goals of the company and the individual. Also, this gives them a chance to fulfill their personal goals by meeting those of the companies. All in all, this pay structure is beneficial for both the individual and the company-reason enough for the pay system to work. - Set out what you think to be the principal over-riding objective of the organisation. Corporate objective: "enlightened value maximization theory" The "enlightened value maximization theory" stresses that the only objective a company needs to have is to maximize the value of its shareholders' wealth. In line with this objective, the Ebay's overall corporate strategy should follow. To carry on a strategy to meet a given objective means to encourage employees to perform well, on behalf of the shareholders. Since employees directly affect management, employees are therefore the agency of the shareholders-shareholders own, but employees control. This agency issue results in a number of discussion among the corporate world, on how employees, specifically managers act to benefit the owners. This agency issue most of the time tempts managers to do action that would benefit themselves, to the detriment of the shareholders. While a number of organizational behavior and human resource experts find out that one of the stimuli to motivation and to employees' behavior are compensation packages, compensation plays a huge part to resolving the agency issue in corporate governance. If a company makes the enlightened value maximization theory its only objective, in order to support that objective an effective strategy and structure should be employed. But to carry on the strategy of the company means to convince its employees to perform well, in pursuant of the objectives. The employees directly affect and control the business; on the other hand there are the real owners. In many instances, these two conflict against each other, making employees to act in their interest, not acting as an agent to the owners. In order to resolve this conflict, managers are rewarded for performing well, which in turn results in increase in shareholder value. The mixture of the base pay and the incentive pay determines how a manager should be rewarded according to his/her efforts. While linking pay to performance has been gauged by determining actual performance as how it deviates, through an increase or a decrease in the targeted performance is a good practice, it encourages managers to resort to committing unethical behaviors such as polishing the results to meet the figures. With the "linear pay-performance link" as an alternative recommendation, the practice does not promote unethical behavior while the manager's interest is kept in line with those of the shareholders'. This alternative encourages the managers to achieve a certain level of performance if he/she wants a certain level of incentive pay. This seems to make more sense when looked at from a shareholders' perspective: the more a manager wants to increase his/her base pay, the harder he/she has to work to improving the shareholders' wealth or other performance metrics that gauge its performance. Bibliography Jensen, M., Murphy, K. J. and E. Wruck (2004). Remuneration: Where we've Been, How We Got to Here, What are the Problems, and How to Fix Them. Available from http://papers.ssrn.com/sol3/papers.cfm'abstract_id=561305#PaperDownload. [Accessed October 30, 2008] Keown, A. J., Martin, J. D., Petty, J. W., Scott, Jr., D. F. (2005) Financial Management: Principles and Applications. New Jersey: Pearson Education, Inc. Chaffey, Dave. (2008 March). DaveChaffey.com: Your Guide to Digital Business. Available from http://www.davechaffey.com/E-commerce-Internet-marketing-case-studies/eBay-case-study-e-commerce. [Accessed October 30, 2008] Business Wire. (2006, May 4). eBay Inc. Outlines Global Business Strategy at 2006 Analyst Conference. Available from http://www.businesswire.com/portal/site/google/index.jsp'ndmViewId=news_view&newsId=20060504006191&newsLang=en. [Accessed October 30, 2008]. Read More