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Chapter 6

Divisional performance measures

5.1 Key principles

 Targets should be linked to the type of business unit – e.g. profit centre.

 Targets should encourage goal congruence – improving divisional
performance should not be in conflict with overall company performance.

5.2 Performance measures for investment centres

 Return on investment Simple to understand/calculate

Should be based on controllable profit

ROI can be boosted either by increasing profit OR
reducing capital employed

Can result in short termism

Danger that managers can boost divisional ROI at the
expense of company ROI

 Residual income Simple to understand/calculate

Should be based on controllable profit

Can result in short termism

Less risk of dysfunctional decision making

TM
 EVA NOPAT – Capital × WACC

Modified version of RI with large number of
adjustments

Good correlation with shareholder value

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