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  • Vyaderm Pharmaceuticals: Project For Performance, Measurement & Control Systems

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    Vyaderm Pharmaceuticals implemented an EVA-based compensation scheme for managers. In 2017, the closure of a competitor led to abnormal returns and bonuses exceeding 100% of base salary. This set unrealistic expectations that could incentivize managers to leave when returns normalized. The target EVA is also calculated based on previous EVA, exacerbating distortions from extraordinary events. It is recommended that in such cases, corporate sets the target EVA to reflect achievable results and retain capable management through fluctuations, as proposed setting 2018 target EVA at $10 million instead of the $27 million calculated standard formula. This would continue incentivizing managers from unexpected upsides while avoiding penalties from distorted future expectations.

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    Vyaderm Pharmaceuticals case study

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    Vyaderm Pharmaceuticals

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    Vyaderm Pharmaceuticals implemented an EVA-based compensation scheme for managers. In 2017, the closure of a competitor led to abnormal returns and bonuses exceeding 100% of base salary. This set unrealistic expectations that could incentivize managers to leave when returns normalized. The target EVA is also calculated based on previous EVA, exacerbating distortions from extraordinary events. It is recommended that in such cases, corporate sets the target EVA to reflect achievable results and retain capable management through fluctuations, as proposed setting 2018 target EVA at $10 million instead of the $27 million calculated standard formula. This would continue incentivizing managers from unexpected upsides while avoiding penalties from distorted future expectations.

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    © All Rights Reserved
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    203 views4 pages

    Vyaderm Pharmaceuticals: Project For Performance, Measurement & Control Systems

    Uploaded by

    theonlypaul
    Vyaderm Pharmaceuticals implemented an EVA-based compensation scheme for managers. In 2017, the closure of a competitor led to abnormal returns and bonuses exceeding 100% of base salary. This set unrealistic expectations that could incentivize managers to leave when returns normalized. The target EVA is also calculated based on previous EVA, exacerbating distortions from extraordinary events. It is recommended that in such cases, corporate sets the target EVA to reflect achievable results and retain capable management through fluctuations, as proposed setting 2018 target EVA at $10 million instead of the $27 million calculated standard formula. This would continue incentivizing managers from unexpected upsides while avoiding penalties from distorted future expectations.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as docx, pdf, or txt
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    Vyaderm Pharmaceuticals

    Case Study

    PROJECT FOR PERFORMANCE, MEASUREMENT & CONTROL SYSTEMS

    ESADE MSC IN FINANCE 2018/19

    GEORG SCHNEIDER
    PAUL HOFER
    JEKATERINA SMERTJEVA
    ROGER FILLET BATISTA
    1
    Q1.

    Q2.

    Q3. Recommendation
    After conducting the exercises of the EVA based compensation scheme, as applied by
    Vyaderm Pharmaceuticals, we want to highlight the most threatening weaknesses to a
    functioning bonus compensation structure. First, in times of abnormal returns, as it happened
    during 2017 due to the closure of a competitor in the antifungal industry, the bonuses can
    grow to more than 100% of the base salary for middle managers, which has the potential to

    2
    set way too high expectations of the managers for future years. Second, in the following years
    after the EVA returns to “normal” levels, the bonus calculations are distorted, making it
    virtually impossible for a manager to earn a bonus. This shows completely wrong incentives,
    as an experienced manager would be incentivized to leave the company after the high bonus
    payments. Since the target EVA is calculated based on the previous EVA, distortions can
    happen easily. In order to avoid these distortions and retain capable management for the
    future, the target EVA should be set by corporate in the case of extraordinary events and
    reflect achievable results for the managers. As a consequence, managers would still
    significantly profit from the upsides of unexpected events, as described in the case, but would
    not be penalized in their expectation of the future.

    In that specific case, we would recommend Mr. Védrine to set the Target EVA for 2018 to
    $10.000.000. This would constitute a significant reduction from the $27.000.000 calculated
    by the standard Target EVA formula. The consequences for a middle manager are depicted in
    the table below.

    To summarize, by making certain adaptions in the calculations of the bonuses during


    extraordinary events, the current scheme could be continued without suffering from negative
    consequences.

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