Duckworth Industries,Inc-

Incentive Compensation Programs

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 Introduction

v Brief Introduction of
Mr. John Duckworth

v Background of Duckworth industries

 Duckworth incentive Plan

v For Plant level Employees

Attendance Bonus:60 cent per hour pay increase if a
employee was never more than 2 min late.
v Plant level Employees up to shift supervisors
Quality Incentive plan
v Profit sharing Plan
All 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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v Sales and supervisory Personnel had individual

incentive plans.
10-40% of base pay
Existing Senior Management Incentive Plans

v These incentive plans went through significant

changes throughout time period from 1983-1992

v 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:

v Cash flows

v Sales Growth of proprietary products

v Inventory turns

v Account Receivables

v Gross margins

v Special individual projects

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v Matrix was built to measure sales and profitability

growth: Exhibit 6
v Annual goals for each business were set which were
determined by performance level of various peer
group companies: Exibit:7
v plan covered dozens of senior managers till 1992
v Phantom stock plan was introduced i.e. increase in
value of per share at the end of 5 years.
v After 92 there was need for new Incentive system as
there were some operational problem were arising.
A Proposed New EVA Incentive
System
 
 

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

v To Align closely the interests of managers and the

share holders
v To provide a self adjusting mechanism
 Logic Behind EVA Calculation

î EVA for a particular year is the product of:

I. Average capital during the year and
II. The spread separating Cost of Capital(CoC) and
Return on capital (RoC) during the year

î By this formula management of each Unit can

separately compensated for the EVA.
 Key Drivers of EVA

v Net Operating Profit after taxes (NOPAT)

Revenue ± Cost of Sales - SG&A ± Cash taxes
v Average Capital
v Cost of Capital
 Mechanism of Calculating Executive
Compensation

î 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
î 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.
v 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
v A bonus sensitivity factor was established
 Advantages of EVA compensation system

v It addressed both Long term and Short term

compensation plans
v It aligned the interest of the managers and the
shareholders
v It was self Adjusting compensation system