Vyaderm

Pharmaceuticals
By Andrea Trujillo, Brittany Irvin, and Ningjie
Wang

Background
Founded in 1945 in Seattle, Washington
Business strategy was focused on earnings per
share
Due to decreasing profits, CEO turned to Economic
Value Added as the sole financial measure at
Vyaderm

EVA Incentive Program

Vyaderms EVA program

Three elements:
EVA centers: represented a separate business
unit with its own balance sheet and income
statement
EVA drivers: EVA drivers were operational
practices that improved EVA results
Vyaderms program was a variable compensation,
EVA-based incentive program

EVA Drivers

Adjustments in Vyaderms EVA Calculation

1. R&D was capitalized and amortized on a straight-line basis over
5 years
2. consumer advertising expenses were capitalized and amortized
on a straight-line basis over three years. Capitalized advertising
was added to net operating assets, and the current years
expense was added back to operating earning
3. Cumulative goodwill was added to net operating assets, the
current years amortization was added back to operating
earnings.
4. restructuring expenses were removed from the profit and loss
statement and added back to net operating assets

Economic Value Added

EVA = 53141.47 174597.87 * 0.11 = $33935.7

Managers Bonus
Calculated Bonus = Target Bonus * EVA Performance
= $200000 * 60% * (1+ (33935.7-2150)/12000)
=$120000 * 3.648
=$437857
Payout = Target Bonus + 50% Remaining Balance
=$120000+0.5(437857-120000)
=$278928.5

Recommendation
We would recommend Mr. Vedrine to implement
the new compensation scheme based on EVA
performance. As we calculated, EVA targets are
both achieved in fiscal year 2000 and fiscal year
2001. Even we assume that the Vyaderm profits
fall back to historical levels in year 2000.