STUDY CASE: GROUPE SCHNEIDER

Economic Value Added and the Measurement of

Financial Performance

CORPORATE FINANCE

Economic Profit and Management
Compensation (continuation)
• Long term incentive, under the form of stock option plan, is
implemented by Schneider with reference to senior and top
managers within the firm, based on rank;
• Long term incentive is connected to target of 15% ROE;
• The amounts to be received by all managers as incentives being
based on ROE achieved during the recent years;
• Where ROE in Schneider is 9%, managers receive 3/15 of the
bonus they would have normally received for a ROE of 15%;
• Supplemental bonus under the form of stock option may as well be
granted by CFO (Pineau – Valencienne), at his discretion;
• In addition to this long term incentive, there is also a variable
portion of the cash compensation earned by managers, based on
three elements:
- economic profit for one level above of division manager –
based on the achievement of the region, based on KPIs set by
considering the specificities of each division (i.e., finance,
research and development, etc);
- economic profit of the division pastored by the manager –
minimum target in place where if not reached zero
compensation is obtained;
- personal goals achievement – which are qualitative, rather
than quantitative and relate to the role of each manager.
The Economic Profit mentioned is actually referring to EVA.
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Capital Investment
Appraisal • Schneider’s weighted average cost of
capital (WACC) is 15%, while new
projects are estimate at a slightly higher
rate;
• Under the given WACC, the estimated
ROE after tax is 12%, below 15%;
• For a ROE after tax of 15%, the WACC
raises to 18%;
• Capital investment are expected to raise to
18%, before tax, despite of some regional
variations on return requirements;
• Capital expenses for renewing assets must
comply with higher targets.

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 • Constant communication is ensured with security analysis
Communicating with the and investment professionals;
•
Capital Markets The purpose is to keep analyst community informed with
respect to Schneider’s efforts in meeting 15% ROE
• Analysts are keen to know the level of the profit margins
(operating income + sales) for various line of business
and cash destination;
• Information on the economic profit were passed onto the
analysis, but not as a major tool of communication;
• In Perrin’s view, the major advantage of economic profit
is that it aligns the incentive of the managers with the
corporate goal of 15% ROE;
• Good results start to appear and shares of Schneider are
well positioned under France stock exchange;
• Schneider become third most wanted stock in France for
foreign investors further to restructuring (sale of Spie
Batignollesdivision), improved profitability and
commitment to shareholders value

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 • Schneider is investigating possibility of being listed to
NYSE;
The Future • In their view, such a step will prove to the market that
they are acting globally;
• After all the entire operational activity of the group is
situated outside France;
• A show stopper for NYSE listing is represented by the
different accounting reporting standards, as in US
GAAP reporting is in place;
• The issue is raised by the merger performed previously
by Schneider, but which does not present interest under
American accounting rules;
• NYSE listing would be possible only if Schneider
receive an incentive from US Securities and Exchange
Commission, otherwise the merger would need to be
seen as an acquisition, adding 7 billions in Schneider’s
balance sheet as goodwill, which, depreciated, will
generate lower corporate profits.

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IOANA BRĂTILĂ
ELENA ONIȘOR
ALEXANDRU
MĂNESCU
IONELA FLORESCU
ADINA DEDEU