A Study of the Impact of the Modified Economic Value Added Compensation System on the Resource Allocation

• Main Authors: Shun-hua Hsieh, 謝舜華
• Other Authors: Ruey-ji Guo
• Format: Others
• Language: zh-TW
• Published: 2008
• Online Access: http://ndltd.ncl.edu.tw/handle/00687459837887754178

碩士 === 東吳大學 === 會計學系 === 96 === In the process of deciding the capital expenditure, the management of an enterprise expects to maximize the compensation (the total profit of business) and optimize the resource allocation; nevertheless, the strategic objective of a manager of a section is to maximize the self-interested compensation. In other words, the interest conflict exists between the self-interested motivations of the management of an enterprise and a manager of a section. With the authorized management and limited resources, this study designs two compensation-system models comprised of the basis of economic value added (EVA) deducting the cost of capital utility from the residual interest of an enterprise. One is the original EVA compensation system deducting the liability and shareholders’ weighed average capital cost as the basis of the compensation. The other is the modified EVA compensation system employing the alternative decucting program replacing the investment program to predict the rate of return and adopting the opportunity cost adjusted by the opportunity-cost correction factors as the basis of the compensation. Meanwhile, it utilizes the equilibrium analysis and numerical analysis of Game Theory to understand whether an enterprise can optimize the resource allocation under the limited resources as raising the specific capital source for facilitating the compensation system to match the objective of maximal compensation. With the deciding situation of the highest management and the investment program proposed by a manager as the variables, the compensation system is simulated through Game Theory. It is found that the original EVA compensation system enables Nash equilibrium point to fall on the strategic composition of both high expected returns from two managers in diverse sections leading to the improper resource allocation. Nonetheless, the modified EVA compensation system in this study enables Nash equilibrium point and the superior strategy adopted by the managers both fall on the strategic composition of the optimal resource allocation leading to the maximal compensation of an enterprise. Moreover, with the modified EVA compensation system, the setting of the correction factors of opportunity cost becomes an important variable. With the higher value set by the highest management, it may decline the compensation expenditure to a section and increase the compensation of an enterprise. However, the diverse setting values influence the proposal strategies of managers of sections as well. If a magnificent difference of the probability of rate of return appears among the investment programs proposed by diverse sections, the setting of the correction factors of opportunity cost must require the value higher than the threshold. In addition, were it less than the expected returns of the lower probability of the investment program and the ratio of the practiceable low returns, it may enable the competitors, managers of sections A and B, to adopt the strategic composition matching the optimal resource allocation expected by the highest management of an enterprise. Besides, the gap of the predicted probability of the returns of the investment programs proposed by diverse sections will also impact the effectiveness of the modified EVA compensation system. Therefore, this system still has the risk of implementation.