Here’s a cracking example for A2 students of how the senior management team of a global business are incentivised to focus on key corporate objectives. This article in the FT explains how Vodafone has made taking market share from rivals a key part of its remuneration for senior management in 2010-1.
According to the FT:
“Vodafone’s top management’s 2010-11 bonus will be based, in descending order of importance, on revenue and competitive performance assessment, free cash flow and operating profit. Free cash flow was given the most significant weighting in 2009-10.”
Free cash flow is a term that is probably new to business students. It is a measure of net cash flow which focuses on the cash flow that is available (“free”) for the business to invest or distribute to shareholders, or to use to repay debts. Essentially free cash flow = operating cash flow less capital spending less tax. Businesses are often valued as a multiple of their free cash flow.
The market share objective / incentive is a great example of how corporate objectives can be used to motivate and focus senior managers.
Students might want to discuss why Vodafone is so keen to improve its market share. The mobile phone markets in most developed economies are now pretty mature / saturated, which often results in more intensive competition amongst the leading players.