The definition of value differs depending on the individual in question. This means that one firm could have varying definitions of this concept depending on those in the leadership positions. These include the main investors, company executives, line managers as well as supervisors and team leaders. It can be noted that this concept affects all business processes, thus referring to every stakeholder within the organization. Therefore, the companies seem to move in many different directions simultaneously with the business processes being driven by different underlying factors, thus leading to stagnation and eventual collapse of the system. It has been noted that while some businesses are able to demonstrate good performance and permanent growth over the years, others develop for a short time and then stagnate or stop their operation. More often there are questions raised about possible reasons for the company’s failure. They use the same management tactics through the short prosperity period. Consequently, after some time, they stop working but are unable to notice that fact since their performance indicators are at this point not relevant to the organization’s situation according to their expectations.
The blue line can be defined as a hypothetical point at which the real value of an investment is greater than the opportunity cost of capital. Thus, the investment can be expected to make profits in the future and not just at present (O’Byrne 2014). From a simplistic perspective, the blue line is the value of the accessible business investment, and in this case, it has been specifically defined as the ‘expected future free cash flows discounted at the opportunity cost of capital.’ However, the challenge is that the value is not simple as compared to the line on the graph. Value, in its true form, is often beyond the grasp of even the best performers among the organizations The reason is that there are a lot of things that could improve the company’s business processes, but they are not valuable. In order to understand the blue line, it is very important to realize the idea of the expected free cash flows. Opportunity cost of capital is the cost of an investment decision that an organization needs to make (Kaiser & Young 2014). This is often easy to reach since it refers to the expenses of the company in line with a given business process or decision. The value of that decision is in contention with most individuals considering the value to be profits, customer loyalty, or the price of the company’s shares (Ding & Zhang 2007).
The negative aspect of these aspects is that they are the factors affecting the company, and not really defining the future of that organization. Moreover, the company’s perspective is defined by its orientation towards the blue line, which is its true value. Expected free cash flows do not depend on the market prices or customer satisfaction, but rather on the validity of the product and its demand at the corresponding time. A popular way of explaining the blue line is the unchanging expectations in terms of the business performance, regardless of any prevailing or changing internal and external circumstances (Kaiser & Young 2014). This would mean that value is the position of the organization in question, without the interference of political, socio-cultural, economic, legal, and technological factors. It basically demonstrates the policy of the company in an ideal situation, which in most cases is considered impossible to fathom. Most companies are strategic in their operations, and they seek to minimize the risks while maximizing their own benefits. This forces them to overlook the possible deterrents and consider them as a part of the organization, thus impeding them from seeing the blue line.
The red line is a more realistic line on the graph, which is measurable by general metrics such as stock prices, the earnings that investors obtain for each share held, customer satisfaction, as determined in the CRM concepts, and the company’s growth in terms of revenue and profits during a given timeframe (Kaiser & Young 2014). These are all the issues that the companies are able to review, and include in their performance. The problem, however, is that they are not sustainable. Consequently, the red line is a point on the graph where the company in question is able to increase their key performance indicators, which are mainly short term success because they only seek to create personal variations of value depending on whoever created the company’s objectives. The organizations that seek to make more profits, get a larger market share, score higher on customer satisfaction reviews and have high market prices because their shares are often focusing on the red line, thus heading for short term gains.
These factors are used by most companies in order to measure their organizational performance. They include customer satisfaction, employee productivity, share prices, revenues, and market share, etc. It can be noted that key performance indicators are very useful to a business organization. The reason is that they help to design the direction in which the company is moving, and can be involved in their organizational learning (Hunt 2007). According to the blue line concept, KPIs are only useful when used to inform choices within the company and not to measure their position with regards to their overall value. KPIs have a direct impact on the share price and revenues due to the fact that the company’s market value is calculated based on the visible factors. However, it must be noted that market value is not the true one, but rather the outcome of a negotiation or speculation that is solely financial and in most cases affected by the personal opinions and relationships. KPIs, in this case, are not the value drivers, and cannot be credited for value creation unless they are used in a way that does not encourage the leadership to work towards higher share prices and employee productivity, etc.
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Perfect pay for performance is mostly connected with leveraging the performance of the company and that of the employees by ensuring that the latter obtain what they have earned. This means that the pay package is defined by the company’s performance. Therefore, the employee’s relative pay has a positive correlation with their relative performance (O’Byrne 2014). At this point, it is important to note that the concept of performance is defined with respect to the shareholder’s interests. In a business setting, the role of shareholder is placed after profits and revenue growth. This means that they are only able to consider performances in terms of the market value of the organization, thus their obsession with stock prices and revenue growth (Ding & Zhang 2007). Regarding the perfect pay for performance concept, the performance of the company and that of the employees is measured based on a set of metrics defined by the overall market situation. This means that it involves much relativity, whereas the company is measured against other similar organizations in the corresponding industry. The employees are thus expected to perform in accordance with the set standards of their competitors, with which they will be evaluated in order to determine what they deserve. It can be noted that this compensation plan is also geared towards increasing shareholder value. Moreover, in the long-term, this can be considered as the blue line concept since it involves creating value for sustainable profitability among other things.
The perfect pay for performance concept is concerned with the salaries paid to the people for what they have actually executed within the organization, relative to the other similar organizations within their industry. In other words, it is a system that relies on key performance indicators, such as share prices and revenues, to determine the value of the employees to the shareholders (O’Byrne 2014). It must be appreciated that the employee’s worth is not necessarily measured with regards to the organization, but to the shareholders. The difference is that one would be interested in the processes while the other is dealing with the numbers, both in the long term and in the short term. The shareholders evaluate an employee highly if their activities contribute significantly to the organization’s financial performance (Firth, Fung & Rui 2006). In order to have any impact on the blue line management, PP4P has to be considered as a value driver in terms of incentivizing the executive management.
Paying attention to the company’s customers is an example of a value driver, which is intended to attract more customers to the company (Kaiser & Young 2014). because the reason is that the organization will be able to learn more information about the needs and expectations of their customers, thus being able to offer better products and services while building long term relationships with these customers for the sustainability of the business (O’Byrne 2014). If they pay more attention to these customers, it results in better pay for the employees. Therefore, they continue satisfying the needs of the customers while also seeking other value drivers in order to remain competitive. The problem is that by incentivizing a value driver, it becomes a performance indicator (Core & Wayne 2010). The employees will seek to ensure that their efforts are visible, thus making it more of a goal than a strategy. This means that from the conventional viewpoint, PP4P destroys the value and thus the blue line management.
In order to understand the functioning of PP4P in a blue line management setting, it is important to consider the indicators as learning platforms for the organization (Kaiser & Young 2014). In the case of the increased attention to customers, a key performance indicator would be customer satisfaction. The managers who work towards maximizing their customer satisfaction levels are often rewarded according to the PP4P plan (Lazear & Shaw 2009). This encourages them to improve their customer satisfaction levels further. The only problem is that by measuring the achievements of the employees in terms of customer satisfaction, the organization will be conditioning them to work towards this indicator as an objective instead of focusing on other aims of the organization. This means that incentivizing a value driver reduces it to the level of indicator, thus undermining the ability of the organization’s employees to draw any value from it. Indicators allow the company to measure the efficiency and effectiveness of their business processes, but they also distract the employees from the real goals and objectives of the organization (Yoshikawa & Rasheed 2009). Consequently, it can be agreed that it is rather difficult to incorporate incentives into the blue line concept. Creating value is more that seeking short term gains, such as compensation packages. However, PP4P focuses basically on this goal.
The PP4P is critical in blue line management approach because it helps the organization to identify its opportunity cost of capital and the net present value in order to ensure that the NPV is always positive (Kaiser & Young 2014). However, with the consideration of relative payment packages and evaluation concepts as indicated in the PP4P, it is rather difficult for the management to detach from manipulating the outcomes in order to favor their personal positions (Zingheim & Schuster 2007). Creating value does not always provide positive results with respect to the key performance indicators. The main reason is that in order to create value, there is often a lot of risks involved and there is a possibility of failure in the process. For a manager who needs to reach success in order to be paid well, it is impossible to be comfortable with risky processes because they compromise their possibilities of a heavy payday. Therefore, PP4P is involved by encouraging managers to embrace the activities that reflect well on the performance indicators, rather than taking risks and creating value for the business (Berman et el. 2008).
Individually, both blue line management and PP4P are very lucrative management concepts that can help an organization to succeed. The difference is in the extent of growth the organization is seeking to experience, and the corresponding period. PP4P challenges the employees to work hard and meet set targets with respect to the company’s key performance indicators. Thus, they enable the shareholders to pay their employees according to their worth to the business, as determined by measuring them against their performance in industry levels. The blue line, on the other hand, requires from the organization to depart from incentivizing indicators and using them for the organizational learning. However, it is difficult to ignore the parameters according to which one’s performance is measured. This implies that the companies need KPIs in order to monitor and evaluate their business processes. However, these KPIs lead them into red line management, which is short term and not sustainable as compared to the blue line alternative. Consequently, PP4P does not enhance blue line management. Moreover, it actually makes it more difficult since the employees will be too busy trying to maximize their own gains to consider the company’s true value as an objective for their activities.