Why Are Your Reward Strategies Not Working? The Role of Shareholder Value, Country Context, and Employee Voice Net Present Value (NPV) / MBA Resources

Introduction to Net Present Value (NPV) - What is Net Present Value (NPV) ? How it impacts financial decisions regarding project management?

NPV solution for Why Are Your Reward Strategies Not Working? The Role of Shareholder Value, Country Context, and Employee Voice case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Why Are Your Reward Strategies Not Working? The Role of Shareholder Value, Country Context, and Employee Voice case study is a Harvard Business School (HBR) case study written by Andreas Kornelakis. The Why Are Your Reward Strategies Not Working? The Role of Shareholder Value, Country Context, and Employee Voice (referred as “Reward Schemes” from here on) case study provides evaluation & decision scenario in field of Communication. It also touches upon business topics such as - Value proposition, Corporate communications, Corporate governance, Human resource management, Innovation, Labor, Motivating people, Workspaces.

The net present value (NPV) of an investment proposal is the present value of the proposal’s net cash flows less the proposal’s initial cash outflow. If a project’s NPV is greater than or equal to zero, the project should be accepted.

NPV = Present Value of Future Cash Flows LESS Project’s Initial Investment

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Case Description of Why Are Your Reward Strategies Not Working? The Role of Shareholder Value, Country Context, and Employee Voice Case Study

The article suggests that when reward strategies fail, it is because they are frequently subsumed to a meaningless search for a best practice that delivers shareholder value that could be applied uniformly across countries, sectors, or workplace contexts. For instance, executive compensation schemes incorporating stock options are focused too much on delivering value for shareholders, and ignore other important stakeholders such as employees. Flexible benefits schemes tend to be designed and implemented top-down, without employee involvement or customizing them to meet their needs. I argue that reward practices should move away from shareholder-value reward to stakeholder reward, making full use of employee voice mechanisms as a key ingredient of workplace innovation. I consider the case of shared capitalism practices and outline the benefits of broad-based employee ownership schemes. The article concludes by offering prescriptive advice for the application of such schemes to enhance productivity and boost employee satisfaction.

Case Authors : Andreas Kornelakis

Topic : Communication

Related Areas : Corporate communications, Corporate governance, Human resource management, Innovation, Labor, Motivating people, Workspaces

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Calculating Net Present Value (NPV) at 6% for Why Are Your Reward Strategies Not Working? The Role of Shareholder Value, Country Context, and Employee Voice Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10014590)	-10014590	-	-
Year 1	3448401	-6566189	3448401	0.9434	3253208
Year 2	3960773	-2605416	7409174	0.89	3525074
Year 3	3972129	1366713	11381303	0.8396	3335076
Year 4	3250859	4617572	14632162	0.7921	2574985
TOTAL			14632162		12688343

The Net Present Value at 6% discount rate is 2673753

In isolation the NPV number doesn't mean much but put in right context then it is one of the best method to evaluate project returns. In this article we will cover -

Different methods of capital budgeting

What is NPV & Formula of NPV,
How it is calculated,
How to use NPV number for project evaluation, and
Scenario Planning given risks and management priorities.

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Capital Budgeting Approaches

Methods of Capital Budgeting

There are four types of capital budgeting techniques that are widely used in the corporate world –

1. Profitability Index
2. Internal Rate of Return
3. Net Present Value
4. Payback Period

Apart from the Payback period method which is an additive method, rest of the methods are based on Discounted Cash Flow technique. Even though cash flow can be calculated based on the nature of the project, for the simplicity of the article we are assuming that all the expected cash flows are realized at the end of the year.

Discounted Cash Flow approaches provide a more objective basis for evaluating and selecting investment projects. They take into consideration both –

1. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Reward Schemes shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.
2. Timing of the expected cash flows – stockholders of Reward Schemes have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.

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Formula and Steps to Calculate Net Present Value (NPV) of Why Are Your Reward Strategies Not Working? The Role of Shareholder Value, Country Context, and Employee Voice

NPV = Net Cash In Flowt1 / (1+r)t1 + Net Cash In Flowt2 / (1+r)t2 + … Net Cash In Flowtn / (1+r)tn
Less Net Cash Out Flowt0 / (1+r)t0

Where t = time period, in this case year 1, year 2 and so on.
r = discount rate or return that could be earned using other safe proposition such as fixed deposit or treasury bond rate. Net Cash In Flow – What the firm will get each year.
Net Cash Out Flow – What the firm needs to invest initially in the project.

Step 1 – Understand the nature of the project and calculate cash flow for each year.
Step 2 – Discount those cash flow based on the discount rate.
Step 3 – Add all the discounted cash flow.
Step 4 – Selection of the project

Why Communication Managers need to know Financial Tools such as Net Present Value (NPV)?

In our daily workplace we often come across people and colleagues who are just focused on their core competency and targets they have to deliver. For example marketing managers at Reward Schemes often design programs whose objective is to drive brand awareness and customer reach. But how that 30 point increase in brand awareness or 10 point increase in customer touch points will result into shareholders’ value is not specified.

To overcome such scenarios managers at Reward Schemes needs to not only know the financial aspect of project management but also needs to have tools to integrate them into part of the project development and monitoring plan.

Calculating Net Present Value (NPV) at 15%

After working through various assumptions we reached a conclusion that risk is far higher than 6%. In a reasonably stable industry with weak competition - 15% discount rate can be a good benchmark.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 15 %	Discounted Cash Flows
Year 0	(10014590)	-10014590	-	-
Year 1	3448401	-6566189	3448401	0.8696	2998610
Year 2	3960773	-2605416	7409174	0.7561	2994913
Year 3	3972129	1366713	11381303	0.6575	2611739
Year 4	3250859	4617572	14632162	0.5718	1858689
TOTAL					10463951

The Net NPV after 4 years is 449361

(10463951 - 10014590 )

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Calculating Net Present Value (NPV) at 20%

If the risk component is high in the industry then we should go for a higher hurdle rate / discount rate of 20%.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 20 %	Discounted Cash Flows
Year 0	(10014590)	-10014590	-	-
Year 1	3448401	-6566189	3448401	0.8333	2873668
Year 2	3960773	-2605416	7409174	0.6944	2750537
Year 3	3972129	1366713	11381303	0.5787	2298686
Year 4	3250859	4617572	14632162	0.4823	1567737
TOTAL					9490627

The Net NPV after 4 years is -523963

At 20% discount rate the NPV is negative (9490627 - 10014590 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Reward Schemes to discount cash flow at lower discount rates such as 15%.

Acceptance Criteria of a Project based on NPV

Simplest Approach – If the investment project of Reward Schemes has a NPV value higher than Zero then finance managers at Reward Schemes can ACCEPT the project, otherwise they can reject the project. This means that project will deliver higher returns over the period of time than any alternate investment strategy.

In theory if the required rate of return or discount rate is chosen correctly by finance managers at Reward Schemes, then the stock price of the Reward Schemes should change by same amount of the NPV. In real world we know that share price also reflects various other factors that can be related to both macro and micro environment.

In the same vein – accepting the project with zero NPV should result in stagnant share price. Finance managers use discount rates as a measure of risk components in the project execution process.

Sensitivity Analysis

Project selection is often a far more complex decision than just choosing it based on the NPV number. Finance managers at Reward Schemes should conduct a sensitivity analysis to better understand not only the inherent risk of the projects but also how those risks can be either factored in or mitigated during the project execution. Sensitivity analysis helps in –

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

What can impact the cash flow of the project.

What are the uncertainties surrounding the project Initial Cash Outlay (ICO’s). ICO’s often have several different components such as land, machinery, building, and other equipment.

Understanding of risks involved in the project.

What will be a multi year spillover effect of various taxation regulations.

Some of the assumptions while using the Discounted Cash Flow Methods –

Projects are assumed to be Mutually Exclusive – This is seldom the came in modern day giant organizations where projects are often inter-related and rejecting a project solely based on NPV can result in sunk cost from a related project.

Independent projects have independent cash flows – As explained in the marketing project – though the project may look independent but in reality it is not as the brand awareness project can be closely associated with the spending on sales promotions and product specific advertising.

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Negotiation Strategy of Why Are Your Reward Strategies Not Working? The Role of Shareholder Value, Country Context, and Employee Voice

References & Further Readings

Andreas Kornelakis (2018), "Why Are Your Reward Strategies Not Working? The Role of Shareholder Value, Country Context, and Employee Voice Harvard Business Review Case Study. Published by HBR Publications.