Annual Report 2016

Performance measurement system

Financial performance measure

The financial performance measures used at Daimler are oriented toward our investors’ interests and expectations and provide the foundation for our value-based management.

Value added

Value added is a key element of our performance measurement system, which is applied at both Group and divisional levels. It is calculated as the difference between operating profit and the cost of capital of average net assets. Alternatively, the value added of the industrial divisions can be determined by using the main value drivers: return on sales (quotient of EBIT and revenue) and net assets’ productivity (quotient of revenue and net assets). (See graphic B.03)

The use of a combination of return on sales and net assets’ productivity within the context of a strategy of profitable revenue growth provides the basis for the positive development of value added. Value added shows the extent to which the Group and its divisions achieve or exceed the minimum return requirements of shareholders and creditors, thus creating additional value.

B.03 Calculation Value Added

The quantitative development of value added and the other financial performance measures is explained in the Profitability chapter.

Profit measure

The measure of operating profit at the divisional level is EBIT (earnings before interest and income taxes). EBIT thus reflects the divisions’ responsibility for profit and loss. The measure of operating profit used at the Group level is net operating profit. It comprises the EBIT of the divisions as well as profit and loss effects for which the divisions are not held responsible. The latter include income taxes and other reconciliation items. (See graphic B.12 on Profitability)

Net assets

Net assets are the basis of the investors’ required return. The industrial divisions are accountable for the net operating assets; all assets, liabilities and provisions which they are responsible for in day-to-day operations are therefore allocated to them. Performance measurement at Daimler Financial Services is on an equity basis. Net assets at the Group level include the net operating assets of the industrial divisions and the equity of Daimler Financial Services, as well as assets and liabilities from income taxes and other reconciliation items which cannot be allocated to the divisions. Average annual net assets are calculated from average quarterly net assets. (See Profitability)

Cost of capital

The required rate of return on net assets, and hence the cost of capital, is derived from the minimum rates of return that investors expect on their invested capital. The cost of capital of the Group and the industrial divisions comprises the cost of equity as well as the costs of debt and net pension obligations of the industrial business; the expected returns on liquidity of the industrial business are considered with the opposite sign. The cost of equity is calculated according to the capital asset pricing model (CAPM), using the interest rate for long-term risk-free securities (such as German government bonds) plus a risk premium reflecting the specific risks of an investment in Daimler shares. While the cost of debt is derived from the required rate of return for obligations entered into by the Group with external lenders, the cost of capital for net pension obligations is calculated on the basis of discount rates used in accordance with IFRS. The expected return on liquidity is based on money-market interest rates. The Group’s cost of capital is the weighted average of the individually required or expected rates of return. During the reporting period, the cost of capital amounted to 8 % after taxes. For the industrial divisions, the cost of capital amounted to 12 % before taxes; for Daimler Financial Services, a cost of equity of 13 % before taxes was applied. (See table B.04)

B.04 Cost of capital

  2016 2015
In percent    
     
Group, after taxes 8 8
Industrial business, before taxes 12 12
Daimler Financial Services, before taxes 13 13

Return on sales

As one of the main factors influencing value added, return on sales is of particular importance for assessing the industrial divisions’ profitability. The combination of return on sales and net assets’ productivity results in return on net assets (RONA). If RONA exceeds the cost of capital, value is created for our shareholders. The measure of profitability for Daimler Financial Services is not return on sales, but return on equity.

Key performance indicators

The important financial indicators for measuring our operating financial performance, in addition to EBIT and revenue, are the free cash flow of the industrial business, investment, and research and development expenditure. Along with the indicators of financial performance, we also use various non-financial indicators to help us manage the Group. Of particular importance in this respect are the unit sales of our automotive divisions, which we use as the basis for our capacity and human resources planning and workforce numbers.

Furthermore, within the context of our sustainability management, we use other non-financial indicators such as the CO2 emissions of our vehicle fleet and the energy and water consumption of our production sites. Non-financial indicators are also used to determine the remuneration of our Board of Management members. In addition, integrity and compliance are important criteria applied in the annual target agreements for our executives, as well as in assessing the achievement of those targets.

Details of the development of non-financial performance indicators can be found in the chapters Business and General Conditions and Sustainability and integrity.

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