Residual income past and future

Residual income past and future This article considers the strengths and weaknesses of value-based management approaches based upon the residual income (RI) concept as the basis for incentive-based reward systems. The objective of these systems is to encourage optimal corporate investment selection by divisional managers and to encourage them to act as if they were independent owners of their divisions sharing a proportion of all losses and all profits. Part 1 of the article considers these systems in the light of the earlier RI debate in the 1960s and 1970s which raised a number of problems applicable to today's value-based systems. It also considers recent attempts to solve, perhaps, the major problem generated in the earlier debate—how to ensure that a single period RI is congruent with project net present value. Part 2 of the article provides a brief survey of current research into incentive systems based on RI. It then presents a possible programme of further research emphasising relevant research in finance theory. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Management Accounting Research Elsevier

Residual income past and future

Management Accounting Research, Volume 9 (4) – Dec 1, 1998

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Publisher
Elsevier
Copyright
Copyright © 1998 Academic Press
ISSN
1044-5005
DOI
10.1006/mare.1998.0091
Publisher site
See Article on Publisher Site

Abstract

This article considers the strengths and weaknesses of value-based management approaches based upon the residual income (RI) concept as the basis for incentive-based reward systems. The objective of these systems is to encourage optimal corporate investment selection by divisional managers and to encourage them to act as if they were independent owners of their divisions sharing a proportion of all losses and all profits. Part 1 of the article considers these systems in the light of the earlier RI debate in the 1960s and 1970s which raised a number of problems applicable to today's value-based systems. It also considers recent attempts to solve, perhaps, the major problem generated in the earlier debate—how to ensure that a single period RI is congruent with project net present value. Part 2 of the article provides a brief survey of current research into incentive systems based on RI. It then presents a possible programme of further research emphasising relevant research in finance theory.

Journal

Management Accounting ResearchElsevier

Published: Dec 1, 1998

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