VYaDerm Pharmaceuticals
VYaDerm Pharmaceuticals
VYaDerm Pharmaceuticals
9-101-019
!"#$%&'()'*+%,-.%/00,
Vyaderm Pharmaceuticals
In 1999 we threw out the old executive compensation system altogether and
introduced EVA. It was meant to be symbolica cathartic change.
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Research Associate Indra A. Reinbergs prepared this case under the supervision of Professor Robert Simons as the basis for
class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
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1
Purchased by: Paulo Oliveira [email protected] on March 22, 2014
101-019
Vyaderm Pharmaceuticals
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%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%
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2
Purchased by: Paulo Oliveira [email protected] on March 22, 2014
Vyaderm Pharmaceuticals
101-019
N;%T+'<"*E%<";C*49"<%76"%C2(C"37%4(%47;%,\\\%'(()'>%*"32*7.
EVA is a tool which simply yet effectively combines the income statement and
balance sheet into one number, by subtracting from earnings a charge for the utilization of
assets employed in generating those earnings.
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3
Purchased by: Paulo Oliveira [email protected] on March 22, 2014
101-019
Vyaderm Pharmaceuticals
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target bonus% ?';% ;"7% ';% '% @4d"<% 3"*C"(7'5"% 2@% 9';"% 3'+.% *'(54(5% @*2E% H0a% @2*% E4<<>"% E'('5"*;% 72
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?';%;74>>%">4549>"%72%<*'?%<2?(%76"%9'>'(C"%4(%76"%9'(W%4(%'(%'E2)(7%"D)'>%72%76"%7'*5"7%92();%3>);
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4
Purchased by: Paulo Oliveira [email protected] on March 22, 2014
Vyaderm Pharmaceuticals
101-019
#2>)(7'*4>+% >"@7% 76"% C2E3'(+.% 76"% 9'>'(C"% 4(% 76"% 92();% 9'(W% ?';% @2*@"47"<$% % N;% T+'<"*EY;% 3*2d+
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;);7'4("<%3"*@2*E'(C"%'(<%C2(74()"<%"E3>2+E"(7$h
Table A
L'E3>"%K2();%1'>C)>'742(
B6"% @2>>2?4(5% "d'E3>"% 4>>);7*'7";% 76"% "@@"C7% 2(% 92();";% 2@% ZTN% 3"*@2*E'(C"% '92#"% '(<
9">2?%76"%ZTN%7'*5"7P
Assumptions:
M'('5"*Y;%K';"%:'+P%
^,00.000
B'*5"7%K2();P
H0a%2@%9';"%3'+%l%^H0.000
ZTN%XE3*2#"E"(7%`2'>
^%G%E4>>42(
ZTN%X(7"*#'>
^%,G%E4>>42(
1'>C)>'7"<%K2();%l%B'*5"7%K2();%d%ZTN%:"*@2*E'(C"
ZTN%:"*@2*E'(C"%l%,%q%miNC7)'>%XE3*2#"E"(7%F%XE3*2#"E"(7%`2'>jQ%X(7"*#'>n
1. Calculated Bonus = Target Bonus x EVA Performance 1. Calculated Bonus = Target Bonus x EVA Performance
= $40,000 x [1 + [10 million - 5 million]/15 million]
= $40,000 x [1+ [-11 million - 5 million]/15 million]
= $40,000 x 1.33
= $40,000 x [ -.067]
= $53,333
= - $2,667
= $46,667
= $4,000
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101-019
Vyaderm Pharmaceuticals
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ZTN$% % X(% "@@"C7.% 764;% ?2)><% C*"'7"% '% ;4(5>"% ZTN% C"(7"*$% % A2?"#"*.% 764;% 3*232;'>% *'(% 4(72% ;7*2(5
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E2*"% 76"+% >2994"<% @2*% g>4("% 2@% ;4567h% 3"*@2*E'(C"% E"';)*";.% 9';"<% 2(% ZTN% <*4#"*;% ;)C6% ';% ;'>";
5*2?76.%*'76"*%76'(%C2*32*'7"%ZTN$%%iL""%Exhibit 4 @2*%'%>4;7%2@%ZTN%<*4#"*;$j
B2% 3>'C'7"% 76"% *"542('>% E'('5"*;.% L'(<"*;% '(<% M+"*;% E'<"% ;"#"*'>% 4(474'>% <";45(% C624C";$
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9"% I% 5>29'>% 3*2<)C7% ZTN% C"(7"*;% i*'(54(5% @*2E% 76"% '(74@)(5'>% 72% 76"% ()7*'C")74C'>% 9);4(";;j.% I
*"542('>% C"(7"*;% i@*2E% 76"% e(47"<% L7'7";% 72% L2)76% N;4'j.% '(<% 76"% C2*32*'7"% ZTN% C"(7"*% 4(% L"'77>"$
=)*76"*E2*".% 72% "';"% 76"% 7*'(;4742(% @*2E% 76"% 2><% 92();% ;+;7"E.% E2;7% 3'*74C43'(7;.% ;)C6% ';% 5>29'>
9);4(";;% ;7'@@% '(<% *"542('>% ;7'@@.% ?2)><% 6'#"% 2(>+% IGa% 2@% 76"4*% ,\\\% 92();% 9';"<% 2(% 76"4*% ZTN
C"(7"*Y;%*";)>7;$%%B6"%*"E'4(4(5%/Ga%*"3*";"(74(5%4(<4#4<)'>%2*%7"'E%52'>;%?2)><%9"%9';"<%2(%ZTN
<*4#"*;.%?64C6%'>>2?"<%@2*%;2E"%;)9c"C74#47+$%%B6"%6"'<%2@%76"%E'('5"*Y;%5>29'>%9);4(";;%)(47%;"7%76"
4(<4#4<)'>% <*4#"*;$% % iL""% Exhibit 6 @2*% ,\\\% 52'>% ?"4567;j$% % =2*% E4<<>"% E'('5"*;% "'*(4(5% 9"7?""(
'92)7%^J0.000%'(<%^-0.000.%76"%ZTN%92();%?';%76"%>'*5";7%3'*7%2@%76"4*%727'>%C2E3"(;'742(%3'CW'5"$
6
Purchased by: Paulo Oliveira [email protected] on March 22, 2014
Vyaderm Pharmaceuticals
101-019
Streamlining EVA
K';"<% 2(% 764;% "d3"*4"(C".% TU<*4(".% L'(<"*;% '(<% M+"*;% <"C4<"<% 72% <*';74C'>>+% *"<)C"% 76"
()E9"*%2@%ZTN%C"(7"*;%@*2E%,G%72%H%'(<%*"2*5'(4_"%76"%C2E3'(+%'>2(5%'%;"C72*%;7*)C7)*"$%%B6);.%'7
76"%9"54((4(5%2@%/000.%T+'<"*E%?';%*"2*5'(4_"<%4(72%76*""%5>29'>%9);4(";;";%iV"*E'72>25+.%X(7"*('>
M"<4C4(".% '(<% T"7"*4('*+% M"<4C4("j.% *)(% 'C*2;;% @2)*% 5"25*'364C% *"542(;% iR2*76% NE"*4C'.% Z)*23".
N;4'.%'(<%r'74(%NE"*4C'j$%%Z'C6%5>29'>%5*2)3%?';%'(%ZTN%C"(7"*.%3>);%76"%C2*32*'7"%6"'<D)'*7"*;%4(
L"'77>"$%%Z'C6%2@%76"%@2)*%ZTN%C"(7"*;%6'<%47;%2?(%ZTN%7'*5"7%'(<%C'>C)>'742($
B6"%5>29'>%;"C72*%6"'<;%<"#">23"<%;7*'7"54C%5>29'>%23"*'74(5%3>'(;.%?64C6%76"%*"542('>%6"'<;
2@%R2*76%NE"*4C'.%Z)*23".%N;4'.%'(<%r'74(%NE"*4C'%4E3>"E"(7"<%'(<%C);72E4_"<%4(%76"%C2(7"d7%2@%'(
'(()'>%23"*'74(5%3>'(%76'7%76"+%<"#">23"<%@2*%76"4*%*"542($%%ZTN%7'*5"7;%@2*%"'C6%ZTN%C"(7"*%?"*"%72
9"% C';C'<"<% <2?(% 72% 76"% 4(<4#4<)'>% 23"*'74(5% )(47;% 76'7% C2E3*4;"<% 76"% <4#4;42($% % =2*% C2*32*'7"
2@@4C"*;.%92();";%?"*"%9';"<%,00a%2(%C2*32*'7"%ZTN.%?64>"%76"4*%<4*"C7%*"32*7;%?"*"%C2E3"(;'7"<%2(
'%E4d%2@%C2*32*'7"%ZTN.%9);4(";;%)(47%ZTN.%'(<%4(<4#4<)'>%2*%7"'E%ZTN%52'>;$
101-019
Vyaderm Pharmaceuticals
T+'<"*EY;% "E3>2+"";% 9"5'(% 5"'*4(5% )3% 3*2<)C742(% 72% 7'W"% '<#'(7'5"% 2@% 76"% 2332*7)(47+.% ?64C6
E'('5"*;%W("?%C2)><%9"%;62*7F>4#"<$%%]64>"%47%?';%(27%C"*7'4(%76'7%:&r%?2)><%*"5'4(%=VN%'33*2#'>.
276"*% 5"("*4C% E'()@'C7)*"*;% ?"*"% C"*7'4(% 72% "(7"*% 76"% E'*W"7% 72% C'37)*"% 76"% 3*2@47% 327"(74'>$% X(% 76"
E"'(74E".%'>>%'#'4>'9>"%*";2)*C";%?"*"%72%9"%<"<4C'7"<%72%*'E34(5%)3%3*2<)C742(S'(<%3*2@47;$
January 2001
V'(4">>"%L'(<"*;% '(<% K>'W"% M+"*;% ?"*"% 3*"3'*4(5% 72% E""7% ?476% M')*4C"% TU<*4("$% % N;% 76"+
6'<%'(74C43'7"<.%/000%3*2@47;%@2*%76"%V"*E'72>25+%9);4(";;%6'<%5*"'7>+%"dC""<"<%76"%ZTN%7'*5"7$%%K)7.
';%"d3"C7"<.%'%("?%C2E3"7472*%6'<%"(7"*"<%76"%5"("*4C%'(74@)(5'>%9);4(";;%>'7"%4(% 76"% +"'*.% C');4(5
3*2@47;% 72% @'>>% 9'CW% 72% 64;72*4C'>% >"#">;$% % B6"% 7?2% 2@@4C"*;% ?2)><% 6'#"% 72% E'W"% '% *"C2EE"(<'742(
*"5'*<4(5%76"%/000%ZTN%92();%@2*%76"%R2*76%NE"*4C'(%V"*E'72>25+%9);4(";;$%%L62)><%76"%7'*5"7%9"
'<c);7"<% 72% *"@>"C7% 76"% g?4(<@'>>h% C*"'7"<% 9+% 76"% "d47% 2@% :&r% @*2E% 76"% 5"("*4C% E'*W"7% 3>'C"f
N*5)E"(7;%C2)><%9"%E'<"%9276%?'+;$
X(%76"2*+.%76"%("?%ZTN%3>'(%?';%;)332;"<%72%6'#"%)(>4E47"<%)3;4<"%327"(74'>$%%e(<"*%764;
#4"?.% 76"% <4#4;42('>% E'('5"*;% ;62)><% *"C"4#"% '% @)>>% 92();% @2*% 76"% )("d3"C7"<>+% 6456% 3*2@47;$% =2*
"d'E3>".%4@%76"%"d47%2@%:&r%@*2E%76"%E'*W"7%"('9>"<%T+'<"*E%72%"dC""<%47;%ZTN%7'*5"7%9+%O00a.%76"(
4(%/000%76"%E'('5"*;%?2)><%*"C"4#"%,00a%2@%76"4*%7'*5"7%92();%3>);% 6'>@%2@%76"%"dC";;%i,G0aj.%?476
76"% *"E'4(<"*% 9"4(5% 9'(W"<$% % X@% 4(% /00,% 76"% V"*E'72>25+% 9);4(";;% 76"(% )(<"*3"*@2*E"<% 47;% ("?.
;)9;7'(74'>>+%6456"*%ZTN%7'*5"7%9+%/00a.%76"%("5'74#"%/00a%?2)><%g?43"%2)7h%76"%32;474#"%9'>'(C"%4(
76"%92();%9'(W$%%N;%'%*";)>7.%76"%E'('5"*;%?2)><%*"C"4#"%(2%92();%@2*%/00,.%'(<%6'#"%(2%C);642(%@2*
/00/$%%M2*"2#"*.%ZTN%3"*@2*E'(C"%E4567%(27%*4;"%72%/000%>"#">;%@2*%;"#"*'>%+"'*;%4(72%76"%@)7)*"$
L74>>.%E'('5"*;%?2)><%6'#"%76"%9"("@47%2@%*"C"4#4(5%'%>)E3%;)E%"'*>+$
L'(<"*;%'(<%M+"*;%?2(<"*"<%4@%76"+%;62)><%'<c);7%76"%ZTN%*";)>7;%;4(C"%764;%?';%C>"'*>+%'
2("F74E"% C2E3"7474#"% ;47)'742($% % L'(<"*;% 7)*("<% 72% M+"*;.% gXYE% '@*'4<% 76'7% ("5'74#"% ZTN% *";)>7;% 4(
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<4#4;42(%'(<%6)*7%"@@2*7;%72%*"C*)47%("?%64*";%?62%?4>>%(27%6'#"%'%92();%9'(W%72%@'>>%9'CW%2($%%K)7%76"
*"'>%3*29>"E%4;%6)E'(%3;+C62>25+$%%B6"%"E2742('>%*2>>"*%C2';7"*%?4>>%9"%*4<4C)>2);$%%o2)%?4>>%("#"*
C6'(5"%76"%3;+C62>254C'>%4E3'C7%2@%?4((4(5%945%764;%+"'*%'(<%3"*@2*E4(5%322*>+%76"%("d7$h
e;4(5% <'7'% @*2E% Exhibit 8, L'(<"*;% '(<% M+"*;% 9"5'(% 72% 3*"3'*"% 76"4*% *"C2EE"(<'742($
L4(C"% 764;% ?';% 76"% @4*;7% +"'*% 2@% 76"% ZTN% 3*25*'E% @2*% 76"% ("?>+% @2*E"<% V"*E'72>25+% <4#4;42(.
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,$
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/$
/000% ZTN% 92();% 3'+2)7% @2*% '% E'('5"*% "'*(4(5% ^/00.000.% ';;)E4(5% 76'7% 76"
E'('5"*Y;%92();%?';%9';"<%,00a%2(%76"%<4#4;42(Y;%ZTN
O$
]476%76";"%C'>C)>'742(;%4(%6'(<.%'(<%'?'*"%2@%76"%*"C"(7%3*";;)*"%2(%;72CW%3*4C";%iExhibit 7j.
L'(<"*;%'(<%M+"*;%?2)><%E'W"%76"4*%*"C2EE"(<'742(%72%M')*4C"%TU<*4("$
8
Purchased by: Paulo Oliveira [email protected] on March 22, 2014
Vyaderm Pharmaceuticals
Exhibit 1(a)
101-019
12E32("(7;%2@%T+'<"*EY;%ZTN%@2*E)>'
CAPITAL
Operating Earnings
+ Advertising expense
+ Restructuring add-back
+ Restructuring add-back
= Capital
Exhibit 1(b)
L'E3>"%LC6"<)>"%2@%!kV%NE2*74_'742(%@2*%,\\\%ZTN%N<c);7E"(7
i@4*;7%+"'*%2@%3*25*'Ej
1995
1996
1997
$ 2,200
$ 2,600
$ 3,100
$ 3,700
Amortization for
1995
300
300
300
300
EVA Adjustment
1996
1997
1998
1999
440
$
$
440
520
$
$
$
440
520
620
$
$
$
$
440
520
620
740
300
1998
$ 2,620
1999
$ 1,500
300
$ 3,700
$ 6,300
$ 9,400
$ 13,100
$ 1,040
$ 2,300
$ 4,180
$ 6,800
$ 6,300
Notes:
9
Purchased by: Paulo Oliveira [email protected] on March 22, 2014
101-019
Exhibit 2
ZTN%X(C"(74#"%:>'(
BONUS
INCENTIVE
TOTAL BONUS
EARNED
Bank
Payout
Target Incentive
Year 0
Actual EVA
Year 1
Target
Improvement
Goal
EVA Interval
Note:
The EVA interval is the shortfall from target that eliminates the bonus. An EVA centers performance (%) = 1 + [(actual improvement - improvement goal)/EVA interval]
EVA
IMPROVEMENT
-10-
Vyaderm Pharmaceuticals
Exhibit 3
101-019
ZdC"*37%@*2E%T+'<"*E%Zd"C)74#"%:*";"(7'742(%Zd3>'4(4(5%76"%M"*47;%2@%ZTN
Most
MostIncentives
IncentivesDont
DontWork
Work. .. .. .
Bonus
Threshold
Performance
Typical Payoff Profile
EVA
EVAIncentives:
Incentives:
Pay
Bonuses
for
Meeting
Pay Bonuses for MeetingEVA
EVAExpectations
Expectations
Bonus
Target EVA
EVA
11
Purchased by: Paulo Oliveira [email protected] on March 22, 2014
101-019
Exhibit 4
Vyaderm Pharmaceuticals
ZTN%V*4#"*;
Improvement
Improvementin
inEVA
EVA
Sales
Customer
Satisfaction
Operating Expenses
New
Products
Volume
Marketing
Product
Pricing
Growth
Overhead
Account
Management
Manufacturing
Costs
Compensation
Training/
Development
Capital Charge
Acquisitions/
Divestitures
Working Capital
Management
Alliances
Accounts
Receivable
R&D
Decisions
Inventory
Management
!
!
!
!
!
!
!
!
!
Reduce Inventory
Reduce Cycle Time
Improve Yields
Reduce Scrap/Waste
Maximize Labor Efficiencies
Improve Vendor Efficiencies
Process Improvements
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
12
Purchased by: Paulo Oliveira [email protected] on March 22, 2014
Vyaderm Pharmaceuticals
Exhibit 5
101-019
T+'<"*E%16'(54(5%[*5'(4_'742('>%L7*)C7)*"
,\\J%[*5'(4_'742('>%L7*)C7)*"%%i,G%:*2@47%k%r2;;%L)9;4<4'*4";j
Corporate HQ (Seattle, WA)
North American
Division
(5 business units)
Asia-Pacific Division
(5 subsidiaries)
,\\\%[*5'(4_'742('>%L7*)C7)*"%%i,G%ZTN%1"(7"*;j
Corporate Consolidated (1 EVA Center)
Global Businesses
(7 EVA Centers)
Antifungals
Anti-infectives
Analgesics
Nutraceuticals
Diagnostics
Gastrointestinals
Antibiotics
Geographic Regions
(7 EVA Centers)
United States
Europe
Japan
Latin America
North Asia
South Asia
Canada
/000%[*5'(4_'742('>%L7*)C7)*"%iH%ZTN%1"(7"*;j
Dermatology
(1 EVA Center)
Internal Medicine
(1 EVA Center)
Veterinary Medicine
(1 EVA Center)
North America
Eur., ME & Africa
Asia
Latin America
13
Purchased by: Paulo Oliveira [email protected] on March 22, 2014
101-019
Vyaderm Pharmaceuticals
%`2'>%]"4567;%F%B*'(;4742(%o"'*%i,\\\j
Exhibit 6
Corporate
EVA
Corporate
9 Management Committee Officers
(includes 3 global product heads)
Staff Officers
Corporate Staff
Business
Unit EVA
Global
Business
EVA
Region
EVA
100%
100%
75%
25%
Global Business
Global Business Staff
75%
Regions
Regional Division President
Regional Marketing Heads
Regional Staff
Country Managers & Controllers
Commercial Directors
Free Standing Businesses
Presidents
Staff
EVA
Drivers
50%
50%
25%
25%
50%
50%
75%
50%
50%
75%
75%
25%
50%
50%
25%
T+'<"*E%L72CW%:"*@2*E'(C"
Exhibit 7
45
40
35
30
25
20
15
10
5
p9
Ja 3
nJu 94
nO 94
ct
M 94
ar
Au -95
gD 95
ec
M -95
ay
Se 96
pFe 96
b9
Ju 7
l-9
N 7
ov
Ap 97
r
Au -98
g9
Ja 8
nJu 99
nO 99
ct
M 99
ar
-0
Ju 0
l-0
D 0
ec
-0
0
Se
14
Purchased by: Paulo Oliveira [email protected] on March 22, 2014
Vyaderm Pharmaceuticals
Exhibit 8
101-019
R2*76%NE"*4C'(%V"*E'72>25+%=4('(C4'>%V'7'%@2*%ZTN%1'>C)>'742(
1996
1997
1998
1999
2000
$ 2,920 (a)
$ 2,150
EVA Target
$ 5,070
EVA Interval
$ 12,000
$ 24,694
$ 31,512
$ 36,584
$ 42,545
$ 92,550
12,487
14,610
17,094
20,000
39,000
34
38
41
45
50
2,500
2,500
2,500
2,500
$ 12,173
$ 14,364
$ 16,949
$ 20,000
$ 51,000
(4,260)
(5,902)
(6,807)
(7,875)
(18,725)
Balance Sheet:
Net Operating Assets
$ 66,949
$ 79,000
$ 93,220
$ 110,000
$ 135,000
$0
$ 2,500
$ 5,000
$ 7,500
$ 10,000
From Footnotes:
Accumulated Goodwill Amortization
Capital Charge for EVA Purposes
11%
$ 200,000
$ 200,000
Bonus Target
n.a.
60%
Bonus Payout
$ 60,000
Note:
(a) EVA was introduced in the Dermatology division for the first time in 2000. The 1999 EVA figure was calculated
retroactively solely to set 2000 EVA targets. The 1999 EVA calculation includes the amortization of a 1995 R&D
expense of $10,673.
15
Purchased by: Paulo Oliveira [email protected] on March 22, 2014