Braddock Industries Inc. Harvard Case Solution & Analysis

Braddock Industries Inc. Case Solution

Introduction

The overall historical analysis of the company’s incentive plan was detailed in the above sections. In the year 2010, the company initiated another plan which focused on the value creation of the company for shareholders and based on that the compensation plan is proposed.  According to this plan, in the case if the company earned return higher from the cost of capital of the company only then the value is created for the shareholders.

The wealth of the shareholder of the company is also referred to as the capitalization of the overall company and it is the responsibility of its manager to come up with some alternatives that could help achieve the desired results. With the help of revenue growth rate, economic value added as well as cash value added the value of the shareholders could be derived. Therefore, under this proposed plan, it is highly important to earn the sufficient revenues growth and the growth in the earnings per share of the company to achieve the desired compensation plan.

The revenues growth of the company could be studied using the different time periods and could be expressed as the percentage as can also be shown in the exhibit 9 of the case which not provides the historical results but also the future expected results in the forecast. It is considered as one of the important metrics in order to evaluate the performance of the company and its managers and could certainly affect the value of the shareholders. Last but not the least is the earnings per share of the company which is also the measure of the company’s profitability and is a measure of the historical earnings.

It can be seen that the earnings per share of the two companies might be similar but its background would be entirely different. The major drawback of this particular performance metric is that it does not take into account the cost of equity of the firm due to which it is not included as the value creation for the shareholders of the company.

Analysis of the Plans

The analysis of the historical, existing as well as the proposed plans based on their effectiveness for the managers as well as the shareholders of the company are analyzed in detail in the below sections.

Long Term Incentive Plan (1st Plan)

The first long term incentive plan initiated by the company was for the five years which was entirely for the executive members of the company and is also based on the performance of the company. It can be seen that the plan proposed a phantom stock which was issued to the members whose value is derived from some of the performance criteria set by the company which includes annual return on equity as well as the compound annual growth rate in the book value of the company.

These performance metrics are then multiplied by the book value per share. So in the case if the book value of the company is increased together with the performance factors then the senior managers would be entitled for the incentives but from the shareholders wealth creation perspective it does not seems logical. The prime reason behind this is that the plan does not take into account the cost of equity of the company which is vitally important for the value creation. Thus it can be concluded that the plan is not the effective one and that the company must devise any other method which can logically yield the true results. Eventually after five years, the company proposed another plan because of its non-performance......................

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