Forward-looking firms have been linking executive compensation to corporate social responsibility (CSR) for years. Research has identified two common types of CSR-contingent compensation contracts. Some firms take a formulistic or objective approach in which executives know in advance how much they can expect to gain by pursuing specified CSR-related activities, while other firms take a more subjective approach in which CSR-contingent compensation is subject to the discretion of compensation committees ex post. Implementing either approach can improve a firm’s CSR ratings. But the pros and cons differ depending on a firm’s industry, growth prospects, and earnings volatility. The subjective approach can be more efficient when, for example, firms are high-tech, risky, young, or fast-growing; are highly visible and facing more public scrutiny; or are implementing new, unconventional CSR projects. On the other hand, the objective approach may make more sense when firms are traditional or mature; are implementing conventional CSR projects or continuing existing CSR projects (so the target is clear and measurable); are expecting stable and predictable project outcomes; or are experiencing poor CSR standings. All firms can try taking a conservative, objective approach to gain experience designing a reward and evaluation system, and then move to a more subjective contract if it makes sense to do so.
This short note introduces all of the important and commonly used financial ratios, organized into five categories: (1) liquidity ratios, which measure a company’s ability to meet short-term debt obligations; (2) leverage ratios, which evaluate a company’s capital structure by measuring how a firm uses debt and equity to finance its operations; (3) efficiency ratios, which measure how efficiently a company is utilizing its assets and resources; (4) profitability ratios, which measure a company’s ability to generate profit from its resources; and (5) market ratios (also called valuation ratios), which evaluate the share price of a company’s stock.
In February 2021, the owner of Anwal Gas Traders, a liquefied petroleum gas distribution company based in Sakesar, Khushab District, in the province of Punjab, Pakistan, was considering whether to invest in expansion. It would be the first significant expansion for the company since its founding in 1998. Based on data provided by a consultancy firm performing capital budgeting techniques, the company would integrate backward to take advantage of perceived market potential. The owner needed to determine whether this investment was worth making and how various scenarios would affect his decision.