Accounting for Decision Making and Control 8th Edition by Jerold Zimmerman

Exercise 14

Fiedler International
You work on a team that reports to the chief financial officer of Fiedler International, a consumer products company that manages a variety of consumer beauty brands (shampoos, facial soaps, deodorants). Your team evaluates possible acquisitions. You are currently analyzing the possible purchase of Lush, a manufacturer of face moisturizers with UV sun blockers. Lush is a small publicly traded company that has no single large shareholder. Most of the stock is held by institutional investors and Lush managers hold a small percentage of the stock.
The materials you have received from Lush include information about its senior management performance evaluation and incentive compensation plans. Lush uses a balanced scorecard to evaluate and reward senior managers. Managers can earn up to 50 percent of their salary as a bonus depending on four balanced scorecard metrics: customer service, human resources and innovation, operational efficiency, and financial performance. Each of the four metrics is scaled between 0 and 1. Senior managers receive up to 25 percent of their bonus for each metric. If the customer service metric is 0.67, and a particular manager's salary is $400,000, then for customer service, that manager receives $33,500 (50% × $400,000 × 0.67 × 25%). The compensation committee of Lush's board of directors sets the scale for each of the four metrics. For example, the financial performance metric is economic value added, or EVA. Last year's EVA was $13 million. The compensation committee sets the lower and upper bound of EVA as $12 million and $16 million. Hence, if the current year's EVA is $12 million, the financial performance metric is 0. If EVA is $15 million, the metric is 0.75 [($15 ? $12)/($16 ? 12)], and the manager earning the $400,000 salary would receive a bonus of $37,500 (50% × $400,000 × 0.75 × 25%).
Fourteen separate metrics are used to compute the four metrics. The following metrics are computed and then aggregated to form the four metrics:
Lush has been using the balanced scorecard for three years and the achieved levels of each metric for the last three years are:
Required:
Write a memo to your acquisition team describing balanced scorecards and the primary reasons they are used, and the likely affect of Lush's use of the balanced scorecard in terms of how Fiedler should be evaluating Lush. Specifically: ( a ) briefly describe balanced scorecards and why firms use them and ( b ) analyze Lush's use of the balanced scorecard and how this might affect Fiedler's evaluation of Lush as a possible takeover target.