Performance measurement system

Value-based management

The performance measurement system used at Daimler is designed to ensure that our investors’ interests and expectations are taken into account within the framework of a value-based management system. Value added shows the extent to which the Group and its divisions achieve or exceed the return requirements of the investors, thus creating additional value.

Value added is derived from the financial value drivers which, due to their direct relationship to ongoing business operations, are utilized as financial performance indicators for the periodic assessment of the performance of the Group and its divisions. In this sense, value added can be calculated as the difference between operating profit and the cost of capital of the average net assets. Alternatively, the value added of the industrial divisions can be determined using the main value drivers of return on sales (quotient of EBIT and revenue) and net assets’ productivity (quotient of revenue and net assets). (See graphic B.03)

Daimler AR2018 B.03 Calculation of value added

The combination of return on sales and net assets’ productivity results in the return on net assets (RONA). If RONA exceeds the cost of capital, value is created for our shareholders. In the case of Daimler Financial Services, return on equity rather than return on sales is used to evaluate profitability. Using a combination of return on sales and net assets’ productivity within the context of a strategy of profitable revenue growth provides a basis for the positive development of value added.

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 of 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 risk of an investment in Daimler shares. Whereas the cost of debt is derived from the required rate of return for obligations the Group enters into 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 year under review, 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

In percent 2018 2017
     
Group, after taxes 8 8
Industrial business, before taxes 12 12
Daimler Financial Services, before taxes 13 13

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

Financial performance measures

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 that is used at Group level is net operating profit. It comprises EBIT 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 table B.19 on Net operating profit

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. Return on sales is the quotient of EBIT and revenue, whereby unit sales are the primary source of revenue. The measure of profitability for Daimler Financial Services is not return on sales but return on equity (quotient of EBIT and equity).

Net assets

All assets, liabilities and provisions for which the industrial divisions are responsible in day-to-day operations are allocated to those divisions. Performance measurement at Daimler Financial Services is implemented on an equity basis. Net assets at 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 on the basis of average quarterly net assets. (see Value Added)

A change to net assets – for example as a result of investments – generally leads to the commitment or release of liquid funds. Along with earnings, net assets thus also have a direct effect on cash flows and therefore on the Group’s financial strength as well. Of particular importance for the financial strength of the Daimler Group is the free cash flow of the industrial business, which comprises the cash flows at the automotive divisions and the cash flows from taxes and other reconciliation items that cannot be allocated to the divisions.

Key performance indicators

The most important financial indicators for measuring the operating financial performance of the Daimler Group, in addition to EBIT and revenue, are the free cash flow of the industrial business, investment and expenditure for research and development.

The most important performance indicator for the profitability of the automotive divisions is return on sales; the most important profitability performance indicator for Daimler Financial Services is return on equity. The other most important performance indicators for the divisions are revenue, investment and expenditure for research and development.

With the 2018 Annual Report, we began using return on sales rather than EBIT to forecast the profitability of the automotive divisions, and return on equity rather than EBIT to forecast the profitability of Daimler Financial Services. In this way, we have established a connection between expectations for the current financial year and the strategic return targets.

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.

Performance indicators that evaluate the implementation status of future-oriented measures associated with the sustainable and technological realignment of the Group, as well as other non-financial performance indicators, are also used to determine the remuneration of our Board of Management members. Important criteria for non-financial performance indicators in the annual target achievement include integrity and compliance, employee satisfaction and the high quality of our products.

Details of the development of non-financial performance indicators can be found in the chapters “Economic Conditions and Business Development” and “Non-Financial Report.”

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