Performance Appraisal Techniques

1

• Performance Appraisal Techniques
• Dr. Khaled Fouad Sherif
• Chief Administrative Officer,
• Africa Region
• The World Bank
• Washington DC
• Web http\\www.ksherif.com

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Performance Appraisal Techniques

• Introduction to Performance Appraisal
• Income statements and balance sheets summarize
  the financial position of an enterprise at a any
  given moment. They reflect the status of an
  organizations revenues and expenses, its assets,
  (the economic resources owned by the
  organization), liabilities (debts owned to
  creditors), and equity (the owners investment in
  the organization). Both the income statement and
  the balance sheet are key performance appraisal
  tools.

3
Exhibit 1 Sample Income Statement
Company X For year ending December 31, 1989 (In
LE)
Revenues Revenues Revenues
Net Sales 3,787,248
Other Income 42,579
Total Revenues Total Revenues 3,829,827
Expenses Expenses Expenses
Cost of Goods Sold 2,796,459
Administrative Selling Expenses 637,509
Interest Expenses 47,516
Total Expenses Total Expenses 3,503,545
Earnings Before Income Taxes Earnings Before Income Taxes 326,282
Income Taxes Income Taxes 152,039
Net Earnings Net Earnings 174,243
4
Sample Balance Sheet
Company X December 31, 1989
Assets
Current Assets
Cash 59,770
Marketable Securities 87,466
Accounts Receivable 559,144
Inventory 618,120
Prepaid Expenses 49,986
Total Current Assets 1,374,486
Fixed Assets
Cost of Goods Sold 25,807
Administrative Selling Expenses 716,076
Cost of Goods Sold 1,010,770
Administrative Selling Expenses 800,103
Interest Expenses 952,550
Total Fixed Assets 2,327,036
Liabilities
Current Liabilities
Notes Payable 48,563
Trade Accounts Payable 207,887
Payrolls Other Accruables 411,362
Income Taxes 124,684
Total Current Liabilities 792,496
Total Long-Term Liabilities 431,350
Total Liabilities 1,223,846
Total Shareholders Equity 1,103,190
Total Liabilities Equity 2,327,036
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Analysis of Balance Sheets and Income Statements

• Each type of analysis of financial data has a
  purpose or use that determines the different
  relationships emphasized. Therefore, it is
  useful to classify ratios into four fundamental
  types
• Liquidity ratios, measure the firms ability to
  meet its maturing short-term obligations.

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Analysis of Balance Sheets and Income Statements

• Leverage ratios, measure the extent to which the
  firm has been financed by debt.
• Activity ratios, measure how effectively the firm
  is using its resources.
• Profitability ratios, measure managements overall
  effectiveness as shown by the returns generated
  on sales and investment.

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Analysis of Balance Sheets and Income Statements

• Liquidity Ratios
• Generally, the first concern of the financial
  analyst is liquidity. they measures the
  short-run solvency of a company its ability to
  meet current debts.
• Current Ratio
• The current ratio indicates whether there are
  enough current assets to meet current
  liabilities.
• Current ratio Current assets
• Current liabilities

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Analysis of Balance Sheets and Income Statements

• Current assets normally include
• Cash, marketable securities, accounts receivable,
  and inventories.
• Current liabilities consist of
• Accounts payable, short-term notes, payable,
  current maturities of long-term debt, accrued
  income taxes, and other accrued expenses
  (principally wages).

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Analysis of Balance Sheets and Income Statements

• When is the company solvent?
• When the current ratio is 1.0 or greater that
  is, the company should have more current assets
  than current liabilities.
• Method for Calculating the Current Ratio
• Add cash, marketable securities, accounts
  receivable, and inventories to get current assets.

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Analysis of Balance Sheets and Income Statements

• Add notes payable, trade accounts payable,
  payrolls and other accurables and income taxes to
  get current liabilities.
• Divide the derived current assets figure by the
  calculated current liabilities figure.

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Analysis of Balance Sheets and Income Statements

• You have now derived the current ratio
• Now, compare the value derived to 1.0
• If the current ratio is 1.0 or greater, the
  company should have more current assets than
  current liabilities and is financially viable or
  solvent.
• If the current ratio is less than 1.0, the
  company will have more current liabilities than
  current assets and is financially unviable or
  insolvent.

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Analysis of Balance Sheets and Income Statements

• For significance this ratio should be compared to
  previous years (e.g. the current ratio for five
  previous years should be derived).
• This is necessary in order to derive a trend
• If the current ratio is rising in an upward
  fashion, the company is becoming more financially
  viable.
• If the current ratio is falling and assuming a
  downward trend, the company is becoming less
  financially viable.

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Analysis of Balance Sheets and Income Statements

• One helpful activity is to also compare the
  current ratio of the company in question to the
  current ratio of similar competing companies.
• If the company in question has a higher current
  ratio on a regular basis over a number of years
  than this company is more financially viable.
• On the other hand, if the company in question has
  a lower current ratio on a regular basis over a
  number of years than this company is less
  financially viable.

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Analysis of Balance Sheets and Income Statements

• b - Quick Ratio, or Acid Test
• The quick ratio is calculated by deducting
  inventory from current assets, and dividing the
  remainder by current liabilities. Inventories
  are deducted since they are typically the least
  liquid of a firms current assets.
• Quick ratio Current assets - Inventory
• Current Liabilities

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Analysis of Balance Sheets and Income Statements

• When is the company solvent?
• When the Quick ratio is 1.0 or greater.
• Which liquidity ratio is more accurate, the
  current ratio or the quick ratio?
• The quick ratio, since it excludes inventory, the
  least liquid asset, and the asset on which losses
  are most likely to occur in the event of
  liquidation.

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Analysis of Balance Sheets and Income Statements

• Method for Calculating the Quick Ratio
• Add cash, marketable securities and accounts
  receivable to get quick assets
• Quick assets by definition is current assets
  inventory
• Add notes payable, trade accounts payable,
  payrolls and other accurables and income taxes to
  get current liabilities.
• Divide the derived quick assets figure by the
  calculated current liabilities figure.

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Analysis of Balance Sheets and Income Statements

• You have now derived the quick ratio.
• Now, compare the value derived to 1.0
• If the quick ratio is 1.0 or greater, the company
  should have more quick assets than current
  liabilities and is financially viable or solvent.
  
• If the quick ratio is less than 1.0, the company
  will have more current liabilities than quick
  assets and is financially unviable or insolvent.

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Analysis of Balance Sheets and Income Statements

• For significance this ratio should be compared to
  previous years (e.g. the quick ratio for five
  previous years should be derived).
• This is necessary in order to derive a trend. If
  the quick ratios is rising in an upward fashion,
  the company is becoming more financially viable.
  
• If the quick ratio is falling and assuming a
  downward trend, the company is becoming less
  financially viable.

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Analysis of Balance Sheets and Income Statements

• One helpful activity is to also compare the quick
  ratio of the company in question to the quick
  ratio of similar competing companies.
• If the company in question has a higher quick
  ratio on a regular basis over a number of years
  then this company is more financially viable.

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Analysis of Balance Sheets and Income Statements

• Leverage Ratios
• Leverage ratios measure the funds supplied by
  owners as compared with the financing provided by
  the firms creditors.

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Analysis of Balance Sheets and Income Statements

• Implications of leverage ratios
• Equity, or owner-supplied funds, provide a margin
  of safety for creditors.
• Thus, the less equity, the more the risks of the
  enterprise to the creditors.

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Analysis of Balance Sheets and Income Statements

• Debt funding enables the owners to maintain
  control of the firm with a limited investment.
• If the firm earns more on the borrowed funds than
  it pays in interest, the return to the owners is
  magnified.
• If the firm earns more on the borrowed funds than
  it pays in interest, the return to the owners is
  magnified.

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Analysis of Balance Sheets and Income Statements

• Low leverage ratios
• Indicate less risk of loss when the economy is in
  a downturn, but lower expected returns when the
  economy booms.
• High leverage ratios
• Indicate the risk of large losses, but also have
  a chance of gaining high profits.

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Analysis of Balance Sheets and Income Statements

• Therefore, decisions about the use of leverage
  must balance higher expected returns against
  increased risk.

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Analysis of Balance Sheets and Income Statements

• Approaches to examining leverage ratios
• Debt ratio
• The debt ratio is the ratio of total debt to
  total assets and measures the percentage of total
  funds provided by creditors.
• The debt ratio is Total debts
• Total assets

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Analysis of Balance Sheets and Income Statements

• Method for Calculating the Debt Ratio
• Add notes payable to long-term liabilities to get
  total debts.
• Add cash, marketable securities, accounts
  receivable, inventories, prepaid expenses, land,
  buildings, machinery and equipment and subtract
  depreciation to derive the total assets figure.
• Divide the total debts figure by the calculated
  total assets figure.

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Analysis of Balance Sheets and Income Statements

• For significance this ratio should be compared to
  previous year (e.g. the debt ratio for five
  previous years should be derived).
• This is necessary in order to derive a trend.
• If the debt ratio is rising in an upward fashion,
  the company is developing a leverage problem.
• If the debt ratio is falling and assuming a
  downward trend, the company is investing more of
  its own resources to generate assets and is
  becoming less dependent on debts.

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Analysis of Balance Sheets and Income Statements

• One helpful activity is to also compare the debt
  ratio of the company in question to the debt
  ratio of similar competing companies.
• If the company in question has a higher debt
  ratio on a regular basis over a number of years,
  then this company is over leveraged in comparison
  to its competitors.
• On the other hand, if the company in question has
  a lower debt ratio on a regular basis over a
  number of years, then this is less dependent on
  debt as a source of financing in comparison to
  its competitors.

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Analysis of Balance Sheets and Income Statements

• B - Debt-to-Equity- Ratio
• This ratio is a variation of the debt ratio that
  is commonly used. It compares the amount of
  money borrowed from creditors to the amount of
  shareholders investment made within a firm.
• Debt-to-Equity ratio Total Debts Shareholder
  s investment (equity)

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Analysis of Balance Sheets and Income Statements

• Method for Calculating the Debt-to-Equity Ratio
• Add notes payable to long-term liabilities to get
  total debts.
• Look up the shareholders investment or equity
  line item in the balance sheet.
• Divide the total debts figure by the calculated
  shareholders investment figure.

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Analysis of Balance Sheets and Income Statements

• For significance this ratio should be compared to
  previous years (e.g. the debt to equity ratio for
  five previous years should be derived).
• This is necessary in order to derive a trend.
• If the debt to equity ratio is rising in an
  upward fashion, the company is developing a
  leverage problem.
• If the debt to equity ratio is falling and
  assuming a downward trend, the company is
  investing more of its owners resources to
  generate assets and is becoming less dependent on
  creditors.

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Analysis of Balance Sheets and Income Statements

• One other helpful activity is to also compare the
  debt to equity ratio of the company in question
  to the debt equity ratio of similar competing
  companies
• If the company in question has a higher debt to
  equity ratio on a regular basis over a number of
  years, then this company is over leveraged in
  comparison to its competitors.
• On the other hand, if the company in question has
  lower debt to equity ratio on a regular basis
  over a number of years, then this company is less
  dependent on debt as a source of financing in
  comparison to its competitors.

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Analysis of Balance Sheets and Income Statements

• Profitability ratios
• Profitability ratios indicate how successful a
  company really is and how effective management is
  in operating the business.

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Analysis of Balance Sheets and Income Statements

• A - Return on assets
• This ratio shows how much money the company
  earned on each dollar it invested in assets. It
  is a measure of overall company earning power or
  profitability.
• Return on Assets (ROA) Net Earnings
• 
  Total Assets

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Analysis of Balance Sheets and Income Statements

• Method for Calculating the Return on Assets
  Ratio
• Derive the net earnings, or net profit figure
  from the income statement.
• Net earnings is simply total revenues minus total
  expenses.

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Analysis of Balance Sheets and Income Statements

• Add cash, marketable securities, accounts
  receivable, inventories, prepaid expenses, land,
  buildings, machinery and equipment and subtract
  depreciation to derive the total assets figure.
• Divide the net earnings figure by the derived
  total assets figure to get return on assets.

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Analysis of Balance Sheets and Income Statements

• For significance this ratio should be compared to
  previous years (e.g. the return on assets ratio
  for five previous years should be derived).
• This is necessary in order to derive a trend. If
  the return on assets ratio is rising in an upward
  fashion, the company is making a larger return on
  funds invested in assets.
• If the return on assets ratio is falling and
  assuming a downward trend, the company is making
  a lower return on funds invested in assets.

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Analysis of Balance Sheets and Income Statements

• One other helpful activity is to also compare the
  return on assets ratio of the company in question
  to the return on assets of similar competing
  companies.
• If the company in question has a higher ROA on a
  regular basis over a number of years, then this
  company is financially better off in comparison
  to its competitors.
• On the other hand, if the company in question has
  a lower ROA on a regular basis over a number of
  years, then this company is financially worse off
  in comparison to its competitors.

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Analysis of Balance Sheets and Income Statements

• B - Profit Margin
• The profit margin is a ratio that shows the
  relationship between net earnings and net sales
  and indicates how much profit the company is
  earning on each dollar in sales.
• Profit Margin Net Earnings
• 
  Net Sales

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Analysis of Balance Sheets and Income Statements

• Method for calculating the profit margin ratio
• Derive the net earnings, or net profit figure
  from the income statement.
• Net earnings is simply total revenues minus total
  expenses.

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Analysis of Balance Sheets and Income Statements

• Derive the net sales line item from the income
  statement.
• Divided the net earnings figure by the derived
  net sales figure to get the profit margin.

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Analysis of Balance Sheets and Income Statements

• For significance this ratio should be compared to
  previous years (e.g. the profit margin ratio for
  five previous years should be derived).
• This is necessary in order to derive a trend.
• If the profit margin ratio is rising in an upward
  fashion, the company is making a larger return on
  sales.
• If the profit margin is falling and assuming a
  downward trend, the company is making a lower
  return on sales.

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Analysis of Balance Sheets and Income Statements

• One other helpful activity is to also compare the
  profit margin of the company in question to the
  profit margin of similar competing companies.
• If the company in question has a higher profit
  margin on a regular basis over a number of years,
  then this company is making a larger return on
  sales in comparison to its competitors.
• On the other hand, if the company in question has
  a lower profit margin on a regular basis over a
  number of years, then this company is making a
  lower return on sales in comparison to its
  competitors.

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Analysis of Balance Sheets and Income Statements

• C - Return on equity (or return on net worth)
• This ratio indicates the amount of net earnings
  resulting from investments in equity.
  Shareholders are particularly interested in this
  ratio, because it shows them how much they are
  earning on their investments.
• Return on equity Net Earnings
• Shareholders investment (Equity)

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Analysis of Balance Sheets and Income Statements

• Method for calculating the return on equity
  ratio
• Derive the net earnings, or net profit figure
  from the income statement.
• Net earnings is simply total revenues minus total
  expenses.

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Analysis of Balance Sheets and Income Statements

• Lookup the shareholders investment or equity
  line item in the balance sheet.
• Divide the net earnings figure by the derived
  shareholders investment figure to get return on
  equity.

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Analysis of Balance Sheets and Income Statements

• For significance this ratio should be compared to
  previous years (e.g. the return on equity ratio
  for five previous years should be derived).
• This is necessary in order to derive a trend.
• If the return on equity ratio is rising in an
  upward fashion, the company is making a larger
  return on funds invested by shareholders.
• If the return on equity is falling and assuming a
  downward trend, the company is making a lower
  return on funds invested by shareholders.

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Analysis of Balance Sheets and Income Statements

• One other helpful activity is to also compare the
  return on equity of the company in question to
  the return on equity of similar competing
  companies.
• If the company in question has a higher return on
  equity on a regular basis over a number of years,
  then this company is making a larger return on
  shareholders investment in comparison to its
  competitors.
• On the other hand, if the company in question has
  a lower return on equity on a regular basis over
  a number of years, then this company is making a
  lower return on shareholders investment in
  comparison to its competitors.

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Analysis of Balance Sheets and Income Statements

• Activity ratios
• Activity ratios measures how effectively the firm
  employs its resources.
• These ratios involve comparisons between the
  level of sales and the investment in various
  asset accounts, like inventories and accounts
  receivable.

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Analysis of Balance Sheets and Income Statements

• A - Inventory turnover
• Inventory turnover tells us how many times during
  the year the entire stock of inventory was sold.
• Inventory turnover is calculated as follows
• Inventory turnover Sales
• 
  Inventory

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Analysis of Balance Sheets and Income Statements

• Method for calculating the inventory turnover
  ratio
• Derive the net sales line item from the income
  statement.
• Derive the inventory valuation figure from the
  balance sheet.
• Divide the sales figure by the derived inventory
  figure to get the inventory turnover.

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Analysis of Balance Sheets and Income Statements

• Problems in arising in calculating and analyzing
  this ratio
• Sales are at market prices. If inventories are
  carried at cost, as they generally are, it is
  more appropriate to use cost of goods sold in
  place of sales in the numerator of the formula.
• Sales occur over the entire year, whereas the
  inventory figure is for one point in time. This
  makes it better to use an average inventory,
  computed by adding beginning and ending
  inventories and dividing by 2.

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Analysis of Balance Sheets and Income Statements

• B - Average collection period
• The average collection period indicates how
  quickly the company collects its accounts
  receivable.

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Analysis of Balance Sheets and Income Statements

• It is computed in the following way
• Annual sales (derived from the income statement)
  are divided by 365 to get average daily sales.
• Accounts receivable (derived from the balance
  sheet) are divided over daily sales to find the
  number of days sales is tied up in receivables.

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Analysis of Balance Sheets and Income Statements

• The average collection period represents the
  average length of time the firm must wait to
  receive cash after making a sale and is
  mathematically defined as follows
• Average collection period Accounts
  receivables
• Sales/365 days

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Analysis of Balance Sheets and Income Statements

• Evaluation of this ratio is based upon the terms
  on which the firm sells its goods.
• For example, if the collection period over the
  past few years for a given company is lengthy
  while its credit policy did not change, this
  would be evidence that steps should be taken to
  expedite the collection of accounts receivable.

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Summary of Financial Ratios
58
Summary of Financial Ratios
59
How to Analyze Financial PositionPotential for
Business Failure

• Bankruptcy occurs when the company is unable to
  meet maturing financial obligations.
• We are thus particularly interested in predicted
  cash flow.
• Financial difficulties affect the price-earnings
  ratio, and the effective interest rate.

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How to Analyze Financial PositionPotential for
Business Failure

• A comprehensive quantitative indicator used to
  predict failure is Altmans Z-score, which
  equals
• Working capital Retained earnings
• X 1.2
  X 1.4
• Total assets Total assets
• Operating income Net Sales
• X 3.3
  X 1.5
• Total assets Total Assets
• N.B. Operating income Net sales - cost of
  goods sold

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How to Analyze Financial PositionPotential for
Business Failure

• A comprehensive quantitative indicator used to
  predict failure is Altmans Z-score, which
  equals
• Working capital Retained earnings
• X 1.2
  X 1.4
• Total assets Total assets
• Operating income MV of common preferred
• X 3.3
  X 0.6
• Total assets Total liabilities
• Sales
• X 0.999
• Total assets
• N.B. Operating income Net sales - cost of
  goods sold

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The Scores and the Probability of Short-term
Illiquidity Follow
Score Probability of Illiquidity or Failure
1.80 or less Very High
1.81 2.99 Not Sure
3.0 or Greater Unlikely
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Example

• A company presents the following information

Working Capital 280,000
Total Assets 875,000
Total Liabilities 320,000
Retained Earnings 215,000
Sales 950,000
Operating Income 130,000
Common Stock Common Stock
Book Value 220,000
Market Value 310,000
Preferred Stock Preferred Stock
Book Value 115,000
Market Value 170,000
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How to Analyze Financial PositionPotential for
Business Failure

• Z-score equals
• 280,000 215,000
  130,000
• X 1.2 X
  1.4 X 3.3
• 875,000 875,000
  875,000
• 480,000 950,000
• X 0.6 X 0.999
  
• 320,000 875,000
• 0.384 0.344 0.490 0.9 1.0846
  3.2026
• The probability of failure is not likely

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Quantitative Factors in Predicting Corporate
Failure

• Low cash flow to total liabilities.
• High debt-to-equity ratio and high debt to total
  assets.
• Low return on investment
• Low profit margin
• Low retained earnings to total assets
• Low working capital to total assets and low
  working capital to sales
• Low fixed assets to noncurrent liabilities
• Inadequate interest-coverage ratio
• Instability in earnings
• Small size company measured in sales and/or total
  assets

66
Quantitative Factors in Predicting Corporate
Failure

• Sharp decline in price of stock, bond price, and
  earnings
• A significant increase in beta. (Beta is the
  variability in the price of the companys stock
  relative to a market index)
• Market price per share is significantly less than
  book value per share
• A significant rise in the companys
  weighted-average cost of capital
• High fixed cost to total cost structure (high
  operating leverage)
• Failure to maintain capital assets. (e.g. decline
  in the ratio of repairs to fixed assets

67
Quantitative Factors in Predicting Corporate
Failure
New Company
Declining Industry
Inability to obtain adequate financing, and when
obtained there are significant loan restrictions
A lack in Management Quality
68
Consolidated Balance Sheets
69
Consolidated Statements of Income
December 31, 1993 1992 Net Sales 47,443,200 45
,684,060 Cost of goods sold 18,371,190 17,995,370
Selling, Admin. General Expense 16,959,630 15,94
4,040 35,330,820 33,939,410 Income before
interest and taxes 12,112,380 11,744,650 Interest
1,136,970 1,243,780 Income before
taxes 10,975,410 10,500,870 Taxes 3,804,010 3,942,
590 Net profit 7,171,400 6,558,280
70
Book Case AnalysisWhich U.S. Company is it?
1992 1993
ROA 21.5 21
ROE 31.4 31.2
PM 14.3 15
CR 3.4 3.4
QR 2.5 2.6
DR 12 13
1992 1993
D/E 18 19
IT 5.2 5.9
Z Score 6.25 5.94
71
Corona Foods - Ratio Findings
85 86 87
ROA -12.3 -11.1 -13.7
ROE -9.0 -10.8 -11.5
CR .694 .642 .647
DR 268 272.1 270.2
D/E 219 267 277
Z Score 1.65 1.38 1.35
72
Performance Contracts

• Introduction to Performance Contracts and
  Memorandums of Understanding

• Performance contracts are used as tools to set
  targets for enterprise management that usually
  include using profitability, liquidity, debt and
  activity ratios as parameters for measuring
  success and failure.
• The idea is to manage by financial objectives and
  to set up systems of rewards and linked to agreed
  upon memorandums of understanding.
• Lets take Corona again as our example

73
Corona Foods Setting Objectives
87 88 89 90
ROA -13.7 -11 -8.8 -7.0
ROE -11.5 -9.2 -7.4 -5.9
CR .647 0.776 0.932 1.12
DR 270.2 216 173 138
D/E 277 222 177 142
Z Score 1.35 1.62 1.94 2.33
20 percent improvement per annum across the
board
74
Corona Foods Coronas Position
87 88 89 90
ROA -13.7 -12.3 -11.1 -10.0
ROE -11.5 -10.4 -9.3 -8.4
CR .647 0.712 0.783 0.861
DR 270.2 243 219 197
D/E 277 249 224 202
Z Score 1.35 1.49 1.63 1.80
10 percent improvement per annum across the
board
75
Corona Foods MOU Agreement Terms
87 88 89 90
ROA -13.7 -11.6 -9.9 -8.4
ROE -11.5 -9.8 -8.3 -7.1
CR .647 0.744 0.856 0.984
DR 270.2 230 195 166
D/E 277 236 200 170
Z Score 1.35 1.55 1.79 2.05
15 percent improvement per annum across the
board
76
Performance Contracts

• Performance Contracts and MOUs, Link to
  Management Pay and Bonuses

• It is critical to establish standard points of
  agreement while giving managers the autonomy to
  sell assets, renegotiate debt and shed staff
• This means that managers would no longer be
  required to conform to certain predetermined
  procedures in the acquisition of resources, as
  well as on expenditures for inputs such as
  personnel, materials and services.
• This autonomy is critical to ensuring that
  managers are not nominally accountable for
  results, and that they are not restricted by
  institutional controls and restrictions that

77
Performance Contracts

• The MOU process typically requires a 90 day
  period to complete
• It should commence 90 days before the beginning
  of the financial year
• The agreement is considered a legal agreement
  that is binding on both slides, and should only
  be amended in the market circumstances and/or
  underlying assumptions in the agreement change
  over the course of the MOU period

78
Performance Contracts

• The process for setting targets should be
  bilateral and should be negotiated between
  management and the institution
• This increases their ownership of the effort
  and their commitment to reaching their targets
• This same technique should be employed by the
  managers themselves as they delegate
  responsibility of certain tasks and projects
  amongst their staff

79
Performance Contracts

• The performance benchmarks should be linked to
  pay, bonuses and stock options
• In countries like China and Korea, failure to
  reach targets set in your MOU is cause for
  immediate dismissal
• Given the low base salaries of civil servants, a
  more appropriate bonus scheme may be
• 500 percent increase in salary if you exceed
  targets
• 300 percent increase in salary if you meet
  targets
• 50 percent increase in salary if you are within a
  small percentage but fail to achieve your targets
• No change to salary if you fail to meet them by a
  sizable margin
• These could then be linked to a broader ESOPs
  program for management and employees

80
Performance Contracts
Benefits
Accountability of managers for results
Speeds up decision-making process by reducing the
need to get approval for all decisions by the
institutions
Increases the ability of managers to respond to
what is happening in the market
Increases the motivation and satisfaction of
managers in their work
81
Performance Contracts

• The process described was first introduced in
  Egypt in 1976 by Dr Fouad Sherif
• Today, it still can be used as a highly effective
  tool for companies that have yet to be privatized
• The key is simply to have buy-in into the process
  and have the administrative cooperation,
  technical cooperation, transparency and incentive
  structures to make it a reality

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Dr. Khaled Fouad Sherif

• Work Tel [phone]
• Home Tel [phone]
• Fax [phone]
• Email KFSHERIF_at_WORLDBANK.ORG
• Web Site http\\www.ksherif.com
• Address The World Bank, 1818 H Street, NW
• Washington DC 20043