Contradictions in the motivation of top managers of corporation by the method of economic added value

Abstract

Subject. The subject of the study is the problem of the possibility of applying the method of economic added value for constructive motivation of the top management of corporations. With the constructive motivation of senior executives, they work in such a way that they do not distort the projected cash flows of projects and the profit indicators of the firm in order to receive appropriate remuneration for that, but solve long-term strategic issues, which allows the company to constantly increase the value of the business. Goals. The purpose of the study is to adjust the known method of economic added value in such a way that it can be used to successfully motivate top managers of the company. In this case, this method is compared with the method of net present value and the method of modified economic added value in order to bring the interests of top managers in line with the interests of the owners of the firm, for example, shareholders in the joint-stock company. Methodology. The proposed methodology consists in applying the actual indicator of the modified economic value added instead of the usual economic added value. This allows you to align priorities of top managers and owners (shareholders) with respect to which investment project from a set of available alternatives should be implemented. Results. The projected modified economic added value, like the net present value, does not in itself provide a reliable guide for the rational motivation of the top manager for the company’s long-term goals. This problem can be solved by placing top managers remuneration in dependence on the actually obtained modified economic added value by years as a result of the implementation of a specific project. In this case, the top managers of the company become constructively motivated to increase the value of the company’s business, as required by shareholders. Conclusions. The results of the research presented by the authors can be useful to both financial analysts and corporate owners. They will help to focus the work of top managers on achieving long-term strategic goals of companies.