1. Staff Metrics Dr Hj Arriffin Mansor1 Arriffin 2009

2. Starting from ROA 1. What is Return on Assets 2. How to calculate the ROA. 1. At macro level 2. At employee level 3. How to calculate the improvement in ROA due to efficiency 4. ROP is a better KPI for salary administration. Return on Pay is for employee and some supervisors2 Arriffin 2009

3. ROA is a total performance measurement PROFIT / ASSETS It indicates how much profit is generated by the value of assets employed by the worker3 Arriffin 2009

4. Return on Assets (ROA) KPI Asset ROA Profit4

5. Input Output Model INPUT Return on Sales SALES TT1 TT2 TT1 TT2 OUTPUT PROFIT5 (a) Input Output Relationship (b) Cause effect Relationship 5

6. The ROA based performance plan Assets ROA Resources Profit Performance Target6 Arriffin 2009

7. PROFIT MARGIN 10% ORIGINAL KPI LINE p SALES 12% IMPROVED KPI LINE 10 Input Change 4 12000 14400 16800 Profit RM Efficiency Volume impact Impact TOTAL IMPROVEMENT = Efficiency + volume improvement 4800 = 2400 2400 4800 = 16800 12000 Arriffin Mansor7 Arriffin 2009

8. Return on Assets (ROA) Formula Income before interest and taxes (EBIT) Net operating income ROA = Average operating assets Cash, accounts receivable, inventory, plant and equipment, and other productive assets.8

9. Understanding ROA Net operating income ROA =Average operating assets Net operating income Margin = Sales Sales Turnover = Average operating assets ROA =Margin Turnover9

10. There are five ways to increase ROA. . . Reduce Expenses Increase Reduce Sales Assets Increase Increase Price turnover10

11. Improved Implementation: Making performance measures line- of-sight Price Revenue Volume Raw Materials NOPAT Tax Cost of Goods Sold Labor Operating Expenses SG&A OtherEVA Cost of Debt Cost of Capital Cost of Equity Plant & Equipment Capital Charge Fixed Capital Property Capital Employed Inventory Working Capital Receivables Legend: Payables High Impact Medium Impact Good Will Low Impact Other Intangibles11

12. Installing the ROA metrics Install responsibility accounting where the following could be prepared at individual employee level. Income and expense accounts Assets and capital used in generating the above revenue Please remember that the sum total of income and assets of all employees should be that of the corporate.12

13. DuPont Analysis Sales COH 2005 $ 1,689,429,000 Cost of Goods Sold + Extra Taxes Net Profits $ 384,153,000 After Taxes $ 358,612,000 Net Profit Operating Margin Income Expenses 21.23%Statement $ 731,891,000 NI/SALES Sales Return on Interest $ 1,689,429,000 Total Assets Expense (ROA) $ 13,641,000 26.17% NPM X TAT Taxes $ 201,132,000 Sales $ 1,689,429,000 Total Asset Turnover 1.23 Return on Current SALES/TA Equity (ROE) Assets 33.96% $ 709,360,000 Total Assets ROA X FLM $ 1,370,157,000 Net Fixed Assets & Other Stockholders $ 660,797,000 EquityBalance $ 1,055,920,000 Financial Sheet Current Leverage Liabilities Multiplier (FLM) $ 265,661,000 Total 1.30 Liabilities Total Liabilities TA/EQUITY Long Term $ 314,237,000 & Stockholders Debt Equity = Total $ 3,270,000 Assets Stockholders $ 1,370,157,000 Other Equity Liabilities $ 1,055,920,00013 $ 45,306,000

14. Problems in responsibility accounting It is easy to recognise revenue for Production and Marketing Departments or sections. Transfer pricing or services revenue is more difficult to understand with regards to departments and sections such HR, Accounts or Purchasing. Nonetheless, it is still possible to measure performance with agreed provisions and transfer pricings with such departments.14 Arriffin

15. Profit per staff Standard # of staff Performed Profits MEASURING THE PERFORMANCE OF HR15

16. Calculating the income for HR and Finance employees? Transfer pricing Profit center accounting or responsibility accounting Income statement for each department, section and employee Balance Sheet for the same above.16

17. The benefits of the ROA at employee level The ROA at employee level is still in alignment with the corporate goal. The ROA strategies are still relevant at all levels. With powerful and cheaper IT facilities, preparing income statement and balance sheet at employee level is becoming more feasable each day. Measuring performance at individual employee level with the ROA is the ultimate in performance measurement. However, ROA at employee and some supervisor level may not be attainable.17

18. The ROA at various levels? At corporate level It is easy to calculate ROA at corporate level. At departmental level Most likely At supervisory level It is still possible to arrive at the ROA at supervisor level At individual level Some employees has no assets attached to them18 Arriffin 2009

19. Steps in calculating ROA for employees 1. Draw an income statement fo each employee 2. Identify assets employed to each employee. (Assets allocated to the employee) 3. ROA determine the viability of each job but not the fairness of the job pay. 4. Use return on pay (ROP) to compare the performance of each employee with relation to their salary or compensation plan. 5. Profits / Sales x Sales / pay = ROP19 Arriffin 2009

20. Return on Pay (ROP) CALCULATE ROP Income per month Divided by the monthly APPLICATION OF ROP salary Justifying salary and payroll within the company and with industry standards Measuring performance2 200

21. Understanding ROP Net operating income ROP = Average Salary Net operating income Margin = Sales Sales Turnover = Average Salary ROP =Margin Turnover21 Arriffin 2009

22. What does ROP means? PROFIT MARGIN X SALES TURNOVER BY EMPLOYEE = RETURN ON PAY. Profit / Sales is profit margin Sales turnover by employee is Sales / Pay To maximise ROP increase profit margin and increase turnover. Most employee has only control over pay turnover.2 Arriffin 20092

23. ROA vs ROP summary ROA is the KPI for all CEOs, managers and ROP is the KPI some for most supervisors employee and some supervisors23 Arriffin 2009

24. When is the ROP applied to the CEO? When the contribution of the CEO is low as compared to his pay use the ROP as a justification.24 Arriffin

25. Thank you Question please25