Blue Line Management - Essay Example

Name of Student: Name of Institution: Date of submission: Blue Line Management This is an aspect of business management that deals with combination of available resources so as to create value while gauging the performance of a company. A number of corporate personnel in business field still face challenges when it terms to initiating value oriented business goals (Kaiser and Young, 11). Value creation in Business According to Kaiser and Young (11-13), value creation is the process aimed at producing a profitable output to the investor. In order for any given investor to achieve a desired value, the investor should try to engage the services of capital appraisal experts so as to know the appropriate venture to commit its funds. This will ensure the output generated from the chosen venture pays off the initially invested capital and gives some form of profit as well. The most preferable method amongst invested in achieving this goal is known as Net Present value method. This method gives an estimate of the expected output of a given venture based on the stated duration of the project and the interest rate applicable for the same. In situations where the Net Present Value, turns out to be negative, that is, the initially invested capital cannot be recovered from the realized output, such ventures are considered unviable and thus the investor is often advised to consider another investment instead. In most cases, an investor may gauge the existing market in his personal opinion and consider a given venture to be a promising one in terms of yielding returns, however personal expectations may not be ideal aspect while measuring value. Despite the fact that expectations of an individual and the product value may not directly related, an individual’s expectations may still prove to be useful since it determines the price that the product will fetch in the market (Kaiser and Young, 11-13). In the market, prices do not actually reflect the anticipated cash flows or even the capital outlay that was invested in the project hence an expected value of a venture does not necessary reflect the prediction of a person (Payne and Pennie, 83-89) Therefore, investors should have in mind not to rely on their personal opinion while estimating the anticipated cash flows from any given venture. According to investment analysts, the anticipated value of a venture is directly related to the future cash flows to be realized and not the individuals’ predicted outputs (Kaiser and Young, 14-16). The other aspect that seems to quite a challenge to investors is the assumption that price of a given product in the market is equivalent to the expected value. As reported by Fitz and Abby (13-15), Price is the exchange value of a given product or service in the market between a buyer and the seller upon reaching an agreement while value on the other hand relates to a designated exchange value assigns by the buyer on the product which tends to be high than the price that is later paid. However, an investor whose product value is equivalent to the anticipated cash flows discounted optimum capital cost; the price in this case may never turn out to be the same as the investor’s expectation. According to blue lime management, the value expected by an investor may keep changing depending on the market situation at a given point in time. The expected value normally changes with the change in anticipated cash flows (Smith, 8-13). According to investment analysts, when an investor commits his/her money in an optimistic Net Present Value, the blue line tends to fluctuate upwards. As reported by Kaiser and Young (14-17), the challenging aspect in relation to this kind of investor’s value analysis is that, the blue line cannot be viewed easily. The only alternative available is to combine all the necessary information pertaining to the investment and analyze them accordingly so as to estimate any future setbacks that might hinder the successful running of the project as desired by the investor. For instance, price may never be equivalent to the anticipated investor’s value regardless of the prevailing market stability, this is due to the fact that, price arises from prevailing market situation as a result of the uniform agreement between the parties involved and not from the anticipated cash flows. Regardless of this challenging aspect of the blue line, it remains the most appropriate mechanism for value oriented investors to gauge themselves in respect to any investment they intend to pursue, this is because every investment decision touches on the expected output which in this case is the value, and hence blue line comes handy. Therefore, any given investment decision may either be value oriented or not, but in most cases it has to be value oriented (Kaiser and Young, 11). Perfect pay for Performance plan According to O'Byrne (29-33), this is the aspect of giving out reward for an excellent output delivered. In the early days, compensation of employees for a given contribution was done on the concept of partnership, mainly between the investors and different managerial personnel. However, such payment mechanisms disappeared with time. The current alternative that employers seem to have adapted is what is known as competitive pay. A competitive pay is whereby human resource personnel determines an employee’s pay based on the prevailing market rate for that particular job description.in most cases it involves comparison with what their competitors’ offer for the same job category (O'Byrne, 29-33), However, the challenging aspect with the competitive pay model is the fact that it fails to outline the direction that companies should follow while establishing the connection between an appropriate payment package and the employees’ output as reflected in the dividends paid out to the company’s shareholders (Lindenauer et al., 487-491). Meanwhile, competitive pay takes into consideration the following aspects: As reported by Lindenauer et al., (487-491), the revenue generated by the workforce, that is, the output realized as a result of the employees dedication and contribution to the organization. Improvement in an organization’s performance that is, rewarding in terms of increased remuneration for high output in comparison to the previous season .The relationship between increases in remuneration, also known as positive change in employee pay and the percentage change in shareholders’ value are referred to as leverage (Burks et al., 458-461) Of late, three different pay for performance models have been developed, these includes leverage as mentioned earlier, alignment and the relative cost. The analysts have given an illustration of how to measure these models based on ancient statistics as well as the extent to which alignment of the organizations’ executives and leverage have fluctuated in the past few years and thus outlining a straight forward payment plan that entails the issuance of yearly grants. At the same time, analysts state the collective inability of organizations to have leverages outlining the aspect of Compensation Discussion and Analysis (Burks et al., 458-461). According to different organizations’ policies, leverage payment can either by upwards or downward depending on the organizations’ output at a given point in time (Mandel and Uma, 652-655). An Illustration of Perfect Pay for Performance Plan: Different analysts tend to argue in their own ways, some are of the view that leverage and alignment are unexpected occurrences of reimbursement program design thus not necessarily liable to wary management issues. In order to illustrate the fact that leverage and alignment can be programmed to generate the anticipated output, researchers have been able to demonstrate the entire process of achieving leverage and alignment of 1.0 as well as relative cost of 0.5 for the period running from 2000 to 2005 with a straight forward reimbursement program that generates yearly grants based on the shares to be earned (Mandel and Uma, 652-655). As stated by analysts, the perfect pay for performance plan (PP4P) has two main features: Each and every performance shares issued at the end of the five year period with a multiple equivalent to 1/ (1+ the industrial output as from the date in which the grant was issued) The value of the grant of the yearly performance share grant is assumed to be equivalent to the market total reimbursement adjusted based on the comparative performance since the beginning of the stated five year period, that is, from 2000 to 2005. According to O'Byrne (31-34), suppose a company known as company A was involved in the Perfect Pay for Performance Plan described above, in scenario where the performance share grant is realized at the end of the year during the entire five year period and based on the fact that company A do not issue dividends, that is, the actual share price of company A is adjusted to include dividends that were invested in the company since the previous years, that is, as from 1999. For instance, the market compensation in the year 2001 was $15m. To arrive at the expected compensation, adjusted has to be made in respect to the performance since 1999. An amount of approximately 15% should be added so as to attain the desired compensation, thereafter multiply the value with a comparative ratio, 0.93 to arrive at the comparative performance since 1999. This will give a desired compensation of $16m. Illustration $15*(1+15%)*0.93=$16m When the desired compensation of $16m is divided by the prevailing share price of $50 based on the assumption that the pay leverage is 1.00, the performance shares to be granted will be 320,000 shares. In scenario where the pay leverage is different, that is, 2.50, the desired market compensation will be attained by adjusting the prevailing market compensation, thereafter multiplying by the comparative wealth ratio raised to the power of the existing pay leverage value, the desired market compensation will be $14.4m (O’Byrne, 31-36). $15*(1+15%) 0.93^2.5=$14.4m The process is always repeated for all the years until all the desired market compensation values and the total numbers of shares available are attained. How to engage Perfect pay for performance plan to enhance Blue Line Management Approach As discussed earlier blue line management is a mechanism aimed at creating value for an organization. The value in this case refers to the anticipated output from any given business venture. Therefore, in order to attain this, proper workforce personnel has to be put in place. The most significant factor is the observation of performance management by the investors or company executives (Kaiser and Young, 11). As reported by Kaiser and Young (11-16), performance management is a process aimed to enhancing an organization’s productivity through putting appropriate measures in place towards the same goal. The major factor towards fulfillment of an organization’s objectives is the incorporation and improvement of the value of the employees. The contribution of the workforce should be taken seriously and adequate reward be offered for the same, this could be in the form of increased remuneration, promotion, improved working conditions and motivations in the workplace, this is also known as performance appraisal. Performance appraisal should be done on a continuous basis so as to encourage the employees to work hard. An effective performance appraisal should evaluate an employee’s accomplishment of the initially set out targets and have a clearly outline compensation plan for the same, the process the investors or the managers will be able to achieve their desired output also known as values (Kaiser and Young, 11-16) However, managers should try and eliminate internal and external factors that may hinder the performance appraisal process (Mandel and Uma, 652-655). BIBLIOGRAPHY Burks, Stephen, Jeffrey Carpenter, and Lorenz Goette. "Performance pay and worker cooperation: Evidence from an artefactual field experiment." Journal of Economic Behavior & Organization 70.3 (2009): 458-469. FitzRoy, Peter, James Hulbert, and Abby Ghobadian. Strategic management: the challenge of creating value. Routledge, 2012: 11-17 Kaiser, K. and Young, S. D. (2014), Managing for Value 2.0. Journal of Applied Corporate Finance, 26: 8–19 Lindenauer, Peter K., et al. "Public reporting and pay for performance in hospital quality improvement." New England Journal of Medicine 356.5 (2007): 486-496. Mandel, Keith E., and Uma R. Kotagal. "Pay for performance alone cannot drive quality." Archives of pediatrics & adolescent medicine 161.7 (2007): 650-655. O'Byrne, S. F. (2014), Three Versions of Perfect Pay for Performance (Or the Rebirth of Partnership Concepts in Executive Pay). Journal of Applied Corporate Finance, 26: 29–38. Payne, Adrian F., Kaj Storbacka, and Pennie Frow. "Managing the co-creation of value." Journal of the academy of marketing science 36.1 (2008): 83-96. Smith, J. Brock, and Mark Colgate. "Customer value creation: A practical framework." Journal of marketing theory and practice 15.1 (2007): 7-23. Read More