Question

Is it a good idea to rate the performance of managers based solely on the DCF model, and what should you watch for if you do such an evaluation?

Answer 1

No it is not a good idea to rate the performance of managers based solely on the DCF model. In order to rate the performance of managers we should make use of the variance analysis for example managers are given many tasks to adhere to a budget or to achieve a specific target within specified time & given resources. Then in order to rate the performance of managers it is good that we should see how much target has been achieved effectively & how much the manager was efficient in utilizing the given resources. We should reward the managers which have adhered to given budget and have achieved maximum benefit for the enterprise.

The DCF model may give distorted results because the enterprise can do heavy capital expenditure due to which the cash flows can be affected which in turn can affect the performance of manager without him/her taking those decisions but still holding him/her responsible for such results will not be correct.    

But the enterprise should be careful in doing variance analysis. The roles & responsibilities of the managers should be clearly identified. Because you can't expect the manager to deliver the desired results without being clearly defined what is expected out of him/her.

While doing variance analysis the enterprise should not do the analysis only on the basis of certain pre-defined ratios but the enterprise should dig deeper in order to analyse  the performance of managers properly & promote or demote them accordingly. Because sometimes what happens is that the performance of the manager gets affected by factors which are out of manager's control like governments policy changes, market factors, etc.

Hence in order to analyse the performance of managers the enterprise should comprehensively keep the above mentioned points in mind.