Situation:
Vyaderm has recently implemented an EVA compensation bonus program for the company. They are looking to create an objective, long-term compensation program which will reward managers for creating the intrinsic value for shareholders. In addition they hope EVA will allow the company to share best practices and create synergies across its 15 subsidiaries.

Problem:
EVA compensation bonus plan creates a morale issue for staff and ultimately can lead to a low retention rate for good managers. PJL’s absence in the market in 2000 causes a temporary increase in price and significantly improves the Dermatology division’s profit margin. Since profits are much higher than their EVA target, managers are able to enjoy a one-time competitive situation. However as new competitors are expected enter the market in 2011, profits will fall back to pre-2000 levels. When the business underperforms, managers’ bonus payouts could potentially be wiped out if there are insufficient funds in the bonus bank. . These conditions demonstrate the fact that managers may be rewarded or penalized for results that are not directly caused by their decisions and efforts. Furthermore Negative EVA results will cause good managers to resign and make the company unattractive to potential talented employees. As a result, it is necessary to modify the current compensation bonus plan.

Recommendation:
The first step in our recommendation requires the company to modify the current bonus payout methodology. Under the current method, managers are entitled to the full amount of target bonus plus 50% of any surplus amount due to results in excess of the EVA goal to the bank balance. Since Mr. Vedrine aims to focus on long-term incentives for talented employees, it makes more sense to keep a larger reserve in the bonus bank. Therefore instead of 50%, we recommend managers to withdraw only 20%