CONTROLLABILITY OF VARIOUS VERSIONS OF RESIDUAL INCOME

Abstract

Residual income should be considered a specific class of metrics rather than just one particular metric. There are at least several concepts of the way residual income should be measured known today. They differ in the degree to which expectations concerning future performance are included in the formula (through economic values). This determines controllability of the measure. High controllability is considered one of two primary properties of a good performance metric (the second one is high goal-congruity). From this perspective, residual income variants known today can be divided into three groups having different levels of controllability: low (expectations affect return on capital as well as cost of capital in the residual income formula), medium (expectations affect only one variable in the residual income formula) and high (expectations do not affect the residual income formula).