Value Based Management
VBM stands for Value-based management. There are many ways of defining but Value-based management at the end of the day is two things:
Number one is trying to find a variable that you can use to determine whether a corporation is creating or destroying value. And I am trying to find a variable because, you know, there are many different consulting companies offering you different things. Offering ways of saying that this is the way you should measure whether you are creating or destroying value. Then there is a competitor and say no, no, we actually have a better way.
Therefore, there is not just one way. There is more than one-way to measure whether a company is creating value or not. But value based management’s
- The first step is to find a variable that we think it possible measures whether we are creating or destroying value.
- Step two or part two of VBM is basically linking that variable (in our case, we’re going to use EVA or economic value-added) to the compensation of executives.
In other words, if we find a variable that appropriately captures whether we are creating or destroying value, we want to set up a compensation system. So that the more of this variable the executives create, then the higher their compensation is going to be. In other words, the more value they create, the higher their compensation is going to be. Therefore, VBM, Value-based management is all about that is
- how do I measure whether I’m creating or destroying corporate value, and
- how do I compensate executives so that they actually have the incentives to create more and more value over time?