Value Based Management
Value Based management, or VBM, is an approach to performance management that evolved over the past twenty to thirty years. It is closely related to what is often called the shareholder revolution and arose from the recognition that traditional measures of accounting profit, based on GAAP (Generally Accepted Accounting Principles), do not always accurately represent true economic profit. Traditional performance management may not always lead to increases in shareholder value despite the fact that it is meant to.
Value Based management is an attempt to rectify this situation. VBM aims to more accurately measure financial performance in order to more successfully manage financial performance. Ultimately, it is intended to improve economic profit and increasing shareholder value.
In order to accomplish this task, Value Based management requires new financial metrics for measuring performance, profit, and value creation. Most importantly, the new metrics take into account the economic cost of capital employed in the business, which traditional accounting ignores. One particularly popular Value Based metric is EVA (Economic Value Added).
VBM also aims to more closely align the financial interests of managers with those of shareholders. In addition to advocating performance measurement metrics and performance management practices that create shareholder value, VBM involves motivating managers to create value by instituting incentive compensation systems that explicitly link executive bonuses, or performance pay, with those very same Value Based metrics.
In sum, Value Based management coordinates all of the elements of a comprehensive performance management system toward the goal of increasing shareholder value, as measured by share price increase and Value Based metrics.