1. Staff Metrics
Dr Hj Arriffin Mansor
1 © Arriffin 2009

2. Starting from ROA
1. What is Return on Assets
2. How to calculate the ROA.
1. At macro level
2. At employee level
3. How to calculate the improvement in ROA due
to efficiency
4. ROP is a better KPI for salary administration.
 Return on Pay is for employee and some
supervisors
2 © Arriffin 2009

3. ROA is a total performance
measurement
PROFIT / ASSETS
It indicates how much profit is generated by
the value of assets employed by the worker
3 © Arriffin 2009

4. Return on Assets (ROA)
KPI
Asset ROA
Profit
4

5. Input Output Model
INPUT
Return on Sales
SALES
TT1 TT2 TT1 TT2
OUTPUT PROFIT
5 (a) Input Output Relationship (b) Cause effect Relationship
5

6. The ROA based performance plan
Assets ROA
Resources
Profit
Performance Target
6 © Arriffin 2009

7. PROFIT MARGIN
10%
ORIGINAL KPI LINE p
SALES
12%
IMPROVED KPI LINE
10
Input
Change
4
12000 14400 16800
Profit RM
Efficiency Volume
impact Impact
TOTAL IMPROVEMENT = Efficiency + volume improvement
4800 = 2400 2400
4800 = 16800 12000
© Arriffin Mansor
7 © Arriffin 2009

8. Return on Assets (ROA) Formula
Income before interest
and taxes (EBIT)
Net operating income
ROA =
Average operating assets
Cash, accounts receivable, inventory,
plant and equipment, and other
productive assets.
8

9. Understanding ROA
Net operating income
ROA =Average operating assets
Net operating income
Margin =
Sales
Sales
Turnover =
Average operating assets
ROA =Margin  Turnover
9

10. There are five ways to increase ROA. . .
Reduce
Expenses
Increase Reduce
Sales Assets
Increase Increase
Price turnover
1
0

11. Improved Implementation: Making performance measures “line-
of-sight”
Price
Revenue
Volume
Raw Materials
NOPAT Tax
Cost of Goods Sold Labor
Operating Expenses
SG&A Other
EVA
Cost of Debt
Cost of Capital
Cost of Equity Plant & Equipment
Capital Charge
Fixed Capital Property
Capital Employed Inventory
Working Capital Receivables
Legend:
Payables
 High Impact
 Medium Impact Good Will
 Low Impact Other
Intangibles
1
1

12. Installing the ROA metrics
 Install responsibility accounting where the
following could be prepared at individual
employee level.
 Income and expense accounts
 Assets and capital used in generating the above
revenue
 Please remember that the sum total of income
and assets of all employees should be that of the
corporate.
1
2

13. DuPont Analysis
Sales COH 2005
$ 1,689,429,000
Cost of Goods
Sold + Extra Taxes Net Profits
$ 384,153,000 After Taxes
$ 358,612,000 Net Profit
Operating Margin
Income Expenses 21.23%
Statement $ 731,891,000 NI/SALES
Sales Return on
Interest $ 1,689,429,000 Total Assets
Expense (ROA)
$ 13,641,000 26.17%
NPM X TAT
Taxes
$ 201,132,000 Sales
$ 1,689,429,000 Total Asset
Turnover
1.23 Return on
Current SALES/TA Equity (ROE)
Assets 33.96%
$ 709,360,000 Total Assets ROA X FLM
$ 1,370,157,000
Net Fixed
Assets & Other Stockholders'
$ 660,797,000 Equity
Balance $ 1,055,920,000 Financial
Sheet Current Leverage
Liabilities Multiplier (FLM)
$ 265,661,000 Total 1.30
Liabilities Total Liabilities TA/EQUITY
Long Term $ 314,237,000 & Stockholders'
Debt Equity = Total
$ 3,270,000 Assets
Stockholders $ 1,370,157,000
Other Equity
Liabilities $ 1,055,920,000
13 $ 45,306,000

14. Problems in responsibility accounting
 It is easy to recognise revenue for Production and
Marketing Departments or sections.
 Transfer pricing or services revenue is more
difficult to understand with regards to
departments and sections such HR, Accounts or
Purchasing.
 Nonetheless, it is still possible to measure
performance with agreed provisions and transfer
pricings with such departments.
14 © Arriffin

15. Profit per staff
Standard
# of
staff
Performed
Profits
MEASURING THE PERFORMANCE OF HR
15

16. Calculating the income for HR and
Finance employees?
 Transfer pricing
 Profit center accounting or responsibility accounting
 Income statement for each department, section and
employee
 Balance Sheet for the same above.
16

17. The benefits of the ROA at employee
level
 The ROA at employee level is still in alignment
with the corporate goal.
 The ROA strategies are still relevant at all levels.
 With powerful and cheaper IT facilities, preparing
income statement and balance sheet at employee
level is becoming more feasable each day.
 Measuring performance at individual employee
level with the ROA is the ultimate in performance
measurement.
 However, ROA at employee and some supervisor
level may not be attainable.
17

18. The ROA at various levels?
 At corporate level
It is easy to calculate ROA at
corporate level.
At departmental level
Most likely
At supervisory level
It is still possible to arrive at
the ROA at supervisor level
 At individual level
Some employees has no assets
attached to them
18 © Arriffin 2009

19. Steps in calculating ROA for employees
1. Draw an income statement fo each employee
2. Identify assets employed to each employee.
(Assets allocated to the employee)
3. ROA determine the viability of each job but not the
fairness of the job pay.
4. Use return on pay (ROP) to compare the
performance of each employee with relation to their
salary or compensation plan.
5. Profits / Sales x Sales / pay = ROP
19 © Arriffin 2009

20. Return on Pay (ROP)
 CALCULATE ROP
 Income per month
 Divided by the monthly  APPLICATION OF ROP
salary  Justifying salary and
payroll within the
company and with
industry standards
 Measuring performance
2
20
0

21. Understanding ROP
Net operating income
ROP = Average Salary
Net operating income
Margin =
Sales
Sales
Turnover =
Average Salary
ROP =Margin  Turnover
21 © Arriffin 2009

22. What does ROP means?
 PROFIT MARGIN X SALES TURNOVER BY
EMPLOYEE = RETURN ON PAY.
 Profit / Sales is profit margin
 Sales turnover by employee is Sales / Pay
 To maximise ROP increase profit margin and
increase turnover.
 Most employee has only control over pay
turnover.
2 © Arriffin 2009
2

23. ROA vs ROP summary
ROA is the KPI
for all CEOs,
managers and ROP is the KPI
some for most
supervisors employee and
some
supervisors
23 © Arriffin 2009

24. When is the ROP
applied to the CEO?
When the contribution of the CEO is low as
compared to his pay use the ROP as a
justification.
24 © Arriffin

25. Thank you
Question please
25