Valley Forms Ltd. is considering introducing a system of EVA and wants its managers to focus on the longer term rather than simply on the year-to-year EVA results. The business is seeking your advice as to how a management bonus system could be arranged so as to ensure that the longer term is taken into account. The business is also unclear as to how much of the managers' pay should be paid in the form of a bonus and when such bonuses should be paid. Finally, the business is unclear as to where the balance between individual performance and corporate performance should be struck within any bonus system. The vice-president of finance has recently produced figures showing that if Valley Forms had used EVA over the past three years, the EVA results would have been as follows:
($ millions)
2003 .......................... 25
2004 .......................... (20)
2005 .......................... 10
Required:
Describe your recommendations for a suitable bonus system for the divisional managers of the business.