BAR Performance Measurement · Updated November 2026
ROI vs Residual Income: Why Can They Recommend Different Decisions?
ROI is a percentage return. Residual income measures dollars earned above a required return.
ROI
A common formula is operating income divided by average operating assets.
Residual income
Residual income is operating income minus the required return on invested assets.
The incentive problem
A division earning a 20% ROI might reject a new 15% project even when the company's required return is only 10%, because the project can lower the division's average ROI.
Residual income alignment
If the new project earns above the required return, residual income can increase, encouraging a decision more aligned with company value.
The takeaway
ROI measures relative performance. Residual income measures dollars earned above the hurdle.
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FAQ
Is higher ROI generally better?
Yes, but incentives can become distorted.
Can a value-creating project lower division ROI?
Potentially.
Is residual income a percentage?
No. It is generally a dollar measure.