CASE STUDY 01

FIGURE EIGHT ISLAND - HOMEOWNERS’ ASSOCIATION, INC.

CASE STUDY 02
China Huaneng Group - Control, Performance Evaluation and
Incentive Systems
 CASE STUDY 01
FIGURE EIGHT ISLAND
HOMEOWNERS’ ASSOCIATION, INC.
CONTENTS

INTRODUCTION ABOUT FIGURE 8 ISLAND HOMEOWNERS

ASSOCIATION, INC

ASSIGNMENT QUESTIONS
 INTRODUCTION ABOUT FIGURE 8 ISLAND HOMEOWNERS
ASSOCIATION, INC

About the island

• Figure Eight Island is a barrier island off the coast of 

North Carolina
•  It is surrounded by the Intracoastal Waterway and the 
Atlantic Ocean
• It is a private island that can only be reached via a guarded
causeway bridge
•  It has been known as a playground for the rich, being a popular
destination for wealthy North Carolinians as well as celebrities
and politicians
 INTRODUCTION ABOUT FIGURE 8 ISLAND HOMEOWNERS
ASSOCIATION, INC

About the island

 INTRODUCTION ABOUT FIGURE 8 ISLAND HOMEOWNERS
ASSOCIATION, INC

About the island

• In 1954 Hurricane Hazel hit the
East Coast and destroyed much of
the development.
•  Beach properties were no longer in
as high demand, and many
landowners wanted to sell their
properties
 INTRODUCTION ABOUT FIGURE 8 ISLAND HOMEOWNERS
ASSOCIATION, INC

About the Island: Reconstruction

• Development on Figure 8 Island began in 1965. As of January
1994, the property tax listings noted 568 total properties on the
island.
• Of this total, 271 properties were developed and 297 properties
were undeveloped. All lots, both developed and undeveloped,
are single family residential properties.
• The majority of homes on the island are vacation residences
belonging to affluent and often high-profile people.
 INTRODUCTION ABOUT FIGURE 8 ISLAND HOMEOWNERS
ASSOCIATION, INC
PLAN FEASIBILITY AND ENVIRONMENTAL ISSUE

In May of 1994, Drs. Cleary and Hosier provided an extensive report

to the Board of Directors.
 Phase I included channel dredging from Middle Sound Channel
with relocation of the dredged sand to the southern ocean side of
the island.
 Phase II called for channel maintenance and shoreline
nourishment for the northern portion of the island
 Phase III proposed continued channel maintenance of the Middle
Sound Channel and dune reconstruction in order to further fight
erosion.
 ASSIGNMETN QUESTIONS

1. What is the average cost to each property owner in Districts A, B,

C, and D if costs are allocated based on relative property values as
suggested by Ms. Martyn (use the allocation of 10% of the total
cost to the endangered lots provided in Table 6).

2. What is the average cost to each property owner in Districts A,

B, C, and D if costs are allocated based on relative benefits
received as suggested by Ms. Olson.

3. Which of the three cost allocations do you believe is the best?

Why? Which is the most fair? Why?
 ASSIGNMETN QUESTIONS

4. What does this analysis suggest about the Homeowner

Association’s policy of charging equal annual dues for each lot? Is
this policy equitable? Why or why not? How do annual dues differ
from the costs of the dredging and replenishment project?

5. How would you respond to each proposal if you were a property

owner?

6. Can you suggest an alternative proposal that would better meet

the objectives of a fair allocation to each property owner?
 Question 1:
Calculate Average cost per lot Based on relative property value

Suggested by STEPHANIE MARTYN (DISTRICT C):

“I think John is taking this a bit far, but does have a point
concerning property values. Reflected in the value of every
property on this island are the characteristics for the particular
property. Location, development status, and size are all built
into the value of the property. Why don’t we allocate and
assess the costs of this project based on the relative
property value of each property on the island? That way a
small interior lot would not pay as much as a large beachfront
property”
 Question 1:
Calculate Average cost per lot Based on relative property value

Step 1: We calculate average value per lot of District A, B, C, D

 Question 1:
Calculate Average cost per lot Based on relative property value

Step 2: We calculate average cost to each property owner in District

A, B, C, D depend on allocation rate
 Question 2:
Calculate Average cost per lot Based on relative benefit received

Suggested by OLSON
District A could be weighted at 5 times property value when
allocating costs.
District B, on the north coast of the island, could be weighted at
twice the property value.
District C could also be weighted at twice the property value.
District D properties could remain weighted at assessed
property values.
 Question 2:
Calculate Average cost per lot Based on relative benefit received
Step 1: Determine the total and average benefits received of each
district
 Question 2:
Calculate Average cost per lot Based on relative benefit received

Step 2: We calculate average cost to each property owner in

District A, B, C, D depend on allocation rate
 Question 3:
Which of the three cost allocations do you believe is the best? Why?
Which is the most fair? Why?

Which of the three cost allocations do you believe is the best?

Method 3: Based on relative benefit received (Suggested by Ms. Olson)

Based on the tax theory, the more money can be earned, the more cost
should be paid.
District A could be weighted at 5 times property value when allocating costs.
Therefore, they must pay the highest average cost per lot ($4,281- $7,134).
In contrast, District D properties could remain weighted at assessed property
values, so they pay the lowest average cost per lot ($340- $567).
 Question 3:
Which of the three cost allocations do you believe is the best? Why?
Which is the most fair? Why?

Which is the most fair?

Method 2: Based on relative property value (Suggested by Ms. Martyn)

- Location, development status, and size are all built into the value of the
property.
- That way a small interior lot would not pay as much as a large beachfront
property.
- This proposal would allocate cost to individual property owners based on
unbiased and straightforward tax assessments of value that are proportional
to property market values. The values given in the case reflect district values,
and from these district values, an average lot value can be derived.
 Question 4:
What does this analysis suggest about the Homeowner
Association’s policy of charging equal annual dues for each lot?
Is this policy equitable? Why or why not? How do annual dues
differ from the costs of the dredging and replenishment project?

In the Homeowner Association’s policy proposed that: “All lot owners pay
equal annual amounts for required membership in the Homeowners
Association. The Homeowners Association does not charge dues based on
property development status, property value, or lot size. Home owner dues
are for the purpose of covering the cost of operations, maintenance and
capital improvements to the island. No percentage of home owner dues are
reserved to cover environmental contingencies like beach restoration or
channel dredging”.
 Question 4:
What does this analysis suggest about the Homeowner
Association’s policy of charging equal annual dues for each lot?
Is this policy equitable? Why or why not? How do annual dues
differ from the costs of the dredging and replenishment project?

From proposal we see that: Owners only pay equal annual amounts for required
membership, not pay for another cost such as the dredging and replenishment
project. Therefore, when this analysis suggested three methods to calculate cost
each property based on: the number of lots (method 1), relative property value
(method 2) and relative benefit received (method 3) support to policy and these
costs are the costs of the dredging and replenishment project. Thus, this analysis
(3 methods) makes policy becoming equitable.
 Question 5:
How would you respond to each proposal if you were a property
owner?

- Proposal 1: Allocates cost using the number of lots on the island. We didn’t
agree with this point. Because, we think it is unfair for all property owners
when they have to pay the equal cost while their property isn’t as much as
about size of lot, property value, benefit values.

- Proposal 2: focuses on relative property values. We think this policy is the

fairest just like we explained in question 3.

- Proposal 3: Based on relative benefit values received. We strongly agree

this policy and we think it is the best policy. Because, it is calculated depend
on method 2 and combine with benefit values received.
 Question 6:
Can you suggest an alternative proposal that would better meet the
objectives of a fair allocation to each property owner?

We couldn’t suggest an alternative proposal that would better.

 CASE STUDY 02
China Huaneng Group
Control, Performance Evaluation and Incentive Systems
CONTENTS

INTRODUCTION ABOUT CHINA HUANENG GROUP

CHNG’S CONTROL OF SUBSIDIARIES

CHNG’S PERFORMANCE EVALUATION SYSTEM

CHNG’S INCENTIVE SYSTEM

RECOMMENDATIONS
 INTRODUCTION ABOUT CHINA HUANENG GROUP

• CHNG was established in August 1988

• State-owned enterprise with 20000 employees
• Headquarters are in Beijing
• Core business is power generation
• Consists of core enterprise, 9 member corporations and 400
subsidiaries throughout China
• Directly controls about 30 overseas branches and companies
• 2 subsidiaries are publicly held: Huaneng International
power development corporation and Shangdong Huaneng
power development corporation.
 INTRODUCTION ABOUT CHINA HUANENG GROUP

• Mission in 1985: address the national shortage

of power
• Mission now: increase profits
• Board of directors are appointed by
government
• The goal: “ Slow steady growth in profits”
 CHNG’S CONTROL OF SUBSIDIARIES

• CHNG has adopted decentralization philosophy.

• CHNG’s investments in subsidiary companies are usually
in the form of joint ventures with local enterprises.
• CHNG is divided into three levels:
- Core enterprise (parent company – decision making and
management center)
- Member companies (are in charge of the management of
operating units as well as making investment decisions)
- Operating units (concentrate on business operations
instead of making investments)
 CHNG’S CONTROL OF SUBSIDIARIES

• Parent company maintains control in 3 areas:

1. Personnel Control
- hiring of managers, total annual compensation (salaries plus bonuses), number
of positions in each function in each company.
2. Investment Money Control (fixed assets and cash)
- Investment. Any new investment (> RMB 30 million yuan in large company; >
RMB 5 million yuan in small company) must be approved by the parent company.
-Financing. The government (State Planning Commission) will fund large projects.
The parent company also acts as the guarantor of other loans, but sets upper
limits.
3. Financial Performance Control
The annual financial targets shall be the previous year's actual operating results.
Financial performance from three aspects to evaluate: profit, return on net assets
and operating activities generated cash flow.
 CHNG’S CONTROL OF SUBSIDIARIES

Strength Weaknesses
• the parent company ensures the basic • the parent company managers may be
quality of managers, and affiliated
appointed because they do not fully
companies maintain a certain influence
understand the local situation can not
• By controlling the total annual
remuneration, company can subordinate its
be competent
managers to link directly with the parent • parent company’s capital expenditures
company and the parent company of the for new projects for approval, may
third level can establish a subsidiary limit the level of capital expenditure
company (business unit) and indirect control • this control method does not take into
• By controlling the number of posts, you can account the different sectors of the
ensure that the parent company can
applicability of the various financial
control the human cost
ratios, without considering return on
• easy to evaluate the profitability of each
net assets in different sectors
subsidiary, cash utilization and efficient
allocation of resources to provide an differences.
accurate basis
 CHNG’S PERFORMANCE EVALUATION SYSTEM

• CHNG's Performance Evaluation System

underwent three stages:
1. Objective System (1989-1991)
2. Contracting-Based Managerial Responsibility
System (1992-1996)
3. Performance Evaluation System (Since 1997)
 CHNG’S PERFORMANCE EVALUATION SYSTEM

• Performance evaluation criteria for power

generation subsidiary companies (factories):
1. actual vs. planned power production units (in
KWH)
2. actual vs. budget profit
3. actual vs. planned monthly loan repayment
and interest payment amount
4. factory security
 CHNG’S PERFORMANCE EVALUATION SYSTEM

Strength Weaknesses
• electricity production is a key success factor • the amount of electricity production
Huaneng Group, to use this indicator to targets, without taking into account
assess, will enable companies to develop downtime, changes in demand for
core competitiveness electricity in different regions and so on
•  with profit targets assessment will lead
• Profits in the development of the
senior managers to increase profits as the
budget, due to various factories is
goal to ensure that the debt can be repaid;
different, the parent company may be
• such a system encourages timely
repayment of debt, so that the parent
required with each of a plants 'bargain‘
company can maintain its credit guarantee • assessment of debt repayment,
reliability because it does not take into account
• this system will also promote safety of the average level of borrowing, thereby
operations under the company's attention encouraging continued borrowing
subsidiaries
 CHNG’S PERFORMANCE EVALUATION SYSTEM

• Performance evaluation criteria for non-power

generation subsidiary companies:
1. actual vs. planned return on stockholders’
equity
2. actual vs. standard return on total assets
3. actual vs. planned monthly loan repayment and
interest payment amount
4. actual vs. planned capital charge payment
amount
 CHNG’S PERFORMANCE EVALUATION SYSTEM

Strength Weaknesses
• to encourage timely • ROE indicators may lead to managers
tend to short-term performance, delay
repayment in the maintenance of fixed assets, or
• focus on the profitability of sale of some assets
• These indicators do not take into
the business and focus on account cash flow, so some of
accounts receivable models subsidiaries may have a large number of
of recycling accounts receivable, cash shortages,
•  the performance evaluation is only
based on the actual number of these
indicators and planned number
compared to, it may lead managers to
the number of under-reporting of the
budget.
CHNG’S INCENTIVE SYSTEM

For subsidiaries:

 A subsidiary obtains a performance score is 100 points: bonus amount will be

50% of the total company’s wages and salaries

 For every performance point over 100 points, it adds 0.5% of the total
company’s wages and salaries to the bonus amount

 For every performance point less than 100 points, it deducts 0.5% of the total
company’s wages and salaries from the bonus amount
CHNG’S INCENTIVE SYSTEM

For individuals:

 The allocation of the bonus pool to individuals depends on the individuals’

organization level and their performance ratings

Organization Level Performance Ratings

• Ethics (20%)
• high-level managers: 4 points • Effort (20%)
• middle managers: 3 points • Capability (20%)
• supervisors: 2.3 points • Performance (40%)

Σ Bonus pool / Σ points of all people The superior’s ratings (50%);

= bonus potential per point peers 30% weight; subordinates'
ratings (20%).
CHNG’S INCENTIVE SYSTEM

For individuals:

 There is a guideline for calculating each subsidiary company general manager’s

bonus.

For companies
For companies
For companies that haven’t For companies
meeting all
doing very met the four with no profit:
four criteria as
well on all four criteria but still
planned or in
criteria: have
standard:
profit: Bonus should
2.5 to 2.8 not be greater
2.0 to 2.5
times 1.5 to 2.0 than the
times
Average times average
Average
company’s Average company’s
company’s
company’s
CHNG’S INCENTIVE SYSTEM

For individuals:

 The annual compensation increases for each employee are paid out 65% as
increases in monthly salary and 35% as one-time bonus.
 CHNG’S INCENTIVE SYSTEM
Although the amount of bonus is not large, but the employees are relatively
satisfied with this bonus system, because such a performance appraisal system
for each employee is transparent and fair.

STRENGTHS WEAKNESSES

 it does not focus on individual

 improve the company's overall
performance incentives, so that may
performance, strengthen unity and
cause staff to a lack of enthusiasm
cooperation within the group
 it may also lead to employees not to
 emphasizes the staff's qualifications,
attach importance to collaboration
experience and educational
with subordinates
background
 managers and ordinary employees
 encouraging employees to the
have little incentive differences, the
company's long-term success as the
managers have little incentive to play
goal
a leadership role
RECOMMENDATIONS FOR IMPROVING CONTROL, PERFORMANCE
EVALUATION AND INCENTIVE SYSTEMS

To improve the control system:

 Attention to balance the affiliated companies 'need to control' and 'operational

flexibility' two goals key to success

To improve the performance evaluation system:

 Some special levels of balanced scorecards can be used

 Note that the performance appraisal system to overcome its inconsistencies,
such as the existing safety standards and improper weight distribution
 Increasing the number of indicators on the cash flows in order to ensure better
liquidity, debt repayment and dividend payments.

To improve the incentive system:

 Encourage staff at all levels of a good relationship between the individual

efforts
 Consider individual performance evaluation and bonus calculations linked to
both motivate individuals, but also encourages teamwork purposes
THANK YOU FOR YOUR ATTENTION!