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Corporate governance and economic value alignment.


As a result of recent problems with corporate reporting and management, renewed interest in Corporate Governance has arisen. We analyze economic value alignment as a form of Corporate Governance, a concept similar to but more encompassing than economic value added and value-based management. We look at some specific ways that various companies and industries have applied economic value added analysis. The results show that the companies that use economic value alignment increase their value significantly over those that do not. The results show that discriminating investors and management should demand that their associated companies use EVA to improve overall financial reporting and to better manage assets. In turn, the SEC and Accounting Standard Setting Bodies should consider the long-term benefits of requiring certain sized companies to report relevant EVA data to key stakeholders. (JEL F49)


Due to recent problems with corporate reporting and management, a renewed interest in corporate governance has arisen. We analyze Economic Value Alignment (EVA) as a form of corporate governance, a concept similar to but more encompassing than economic value added and value based management. Corporate governance can be defined as the laws, policies and procedures that ensure that (1) firms run in the interest of owners and (2) scarce resources are allocated, managed and redeployed to maximize productivity and value.

At the board level, governance involves (1) board composition and incentives, (2) transparency and disclosure, (3) proxy contests, hostile takeovers and (4) the glare of media attention and criminal penalties. Management level governance is also important. Questions management needs to answer include (1) What are the best practices in getting managers and employees to think and act like owners? (2) Which management processes, organizational structures and incentive plans produce superior financial returns? and (3) How can top executive leadership and attitudes help create or destroy shareholder value?

Economic Value-Alignment is based on EVA, which in turn is based on profits. It examines an entity's ability to cover its full costs, including the cost of capital. Unless it covers its cost of capital, it does not create wealth. By measuring the value added over all costs, including the cost of capital, EVA measures, in effect, the productivity of all factors of production. It does not, by itself, tell us why a certain product or a certain service does not add value or what to do about it. But it shows us what we need to find out and whether we need to take remedial action. Expected value added can also be used to find out what works. It shows which product, service, operation, or activity has unusually high productivity and adds unusually high value. Economic value-alignment aligns the expected value added concept to the entire management of the business entity.

Shareholder Value

Shareholder value creation has become one of the most widely discussed issues in business today. Organizations whose share prices do not keep pace with market expectations face increasingly impatient and even hostile boards of directors and shareholder activists. Even small deviations from expectations can greatly affect share prices and managerial actions. Yet, while many embrace a dynamic economy and the generation of wealth, many others view maximizing shareholder value as a corporate agenda that is hostile to employees, the environment and communities.

This debate has several dimensions. First is the question of whether the current fascination with shareholder value is appropriate. Philosophically, two distinct positions on this issue arise. On one side, some argue that an organization's only objective should be to maximize shareholder value. Corporations should not undertake such pursuits as charitable activities or community building events. The shareholders (not management) should decide where to allocate these resources, through the dividends or capital gains they receive. This pure shareholder view resonates most strongly in the USA.

Another view holds that focusing exclusively on shareholder value is not cost-beneficial. This view argues that equal attention must be paid to all stakeholders--employees, customers, the community and shareholders--if a firm can enjoy long-term success. This is the pure stakeholder view that many European countries support.

Between these views is the position of "the shareholder is the first among equals," probably best characterized by the late Robert Goizueta, CEO of Coca Cola, who was fond of saying, "We work hard to remember that the wonderful things our company is capable of--serving our customers, creating jobs, positively impacting society--happen only as long as we fulfill our vision of creating value for our shareholders."

A second debate arises at the measurement level. As today's long-term increased focus on shareholder value creation intensifies, so have the metric wars. Traditional accounting measures such as net income, EPS and ROA have been routinely criticized as misleading, manipulative and ineffectual in disclosing an organization's value creating performance. In turn, proponents of economic value measures have responded with specific metrics and methodologies that claim to both better measure and motivate the creation of shareholder value.

Wealth Versus Value

Understanding this debate requires distinguishing between the notions of wealth and value. Stock market performance is a direct external measure of wealth. Wealth measures are important and straightforward, but also have limitations. By definition, they are only useful for publicly traded corporations. As market measures, they are influenced by events beyond the control of the firm, such as general economic and industry trends and by bullish/bearish public sentiments. Furthermore, stock market measures seldom provide an adequate measure of senior employee performance below that of CEO and cannot measure the success or failure of individual subsidiaries or business units that are not separately traded.

This is where value comes in. Value is an internal performance measure that derives from internal company reports. Measuring value and the amount of value added in any period is more problematic than measuring wealth because there is more disagreement on what value is. In recent years, firms such as Stern Stewart, Braxton, Holt, Alcar, Marakon and several public accounting firms have developed practices that encourage their clients to reduce their reliance on traditional measures of accounting value and move toward a closer approximation of cash flow, or economic value. Perhaps the best known of these firms is Stern Stewart and its registered Economic Value Added (EVA) measure. Early Stern Stewart claims asserted a link between economic value and wealth performance, arguing, for example, that firms should "forget EPS, ROE and ROI--it is EVA that drives stock prices;" that "EVA stands well out from the crowd as the single best measure of wealth creation" and that "EVA is almost 50% better than its closest accounting-based competitor in explaining changes in shareholder wealth," [Armitage et al., 2003, pp. 34-35].

The EVA Concept of Profitability

EVA is based on the concept that a successful firm should earn at least its cost of capital. Firms earning higher returns than financing costs benefit shareholders and account for increased shareholder value. In its simplest form, EVA can be expressed as the following equation:

EVA = Operating Profit After Tax (NOPAT' - Cost of Capital)

NOPAT is calculated as net operating income after depreciation, adjusted for items that move the profit measure closer to an economic measure of profitability. Adjustments include such items as additions for interest expense after-taxes (including any implied interest expense on operating leases); increases in net capitalized R & D expenses; increases in the LIFO reserve; and goodwill amortization. Adjustments made to operating earnings for these items reflect the investments made by the firm or capital employed to achieve those profits. Stern Stewart has identified over 164 items for potential adjustment, but often only a few adjustments are necessary to provide a good measure of EVA [Prober, 2000 p. 27].

Measurement of EVA

Firms can measure EVA using either an operating or financing approach. Under the operating approach, NOPAT is derived by deducting cash operating expenses and depreciation from sales, and excluding interest expense (as it is considered a financing charge). Adjustments that are referred to as equity equivalent adjustments are designed to reflect economic reality and move income and capital to a more economically based value. These adjustments are considered with cash taxes deducted to arrive at NOPAT.

The operating approach starts with assets and builds up to invested capital, including adjustments for economically derived equity equivalent values. The financing approach, on the other hand, starts with debt and adds all equity and equity equivalents to arrive at invested capital. Finally, the weighted average cost of capital, based on the relative values of debt and equity and their respective cost rates, is used to arrive at the cost of capital, which is multiplied by the capital employed and deducted from the NOPAT value. The resulting amount is the current period's EVA.

EVA as a Metric

As metrics go, EVA is simple enough. The calculation is roughly as follows:

EVA = Net Operating Profit After Taxes (NOPAT) - (Capital x Cost of Capital)

Since there is no pure NOPAT from an IT investment, its calculation should take a modified form for IT proposals. For example, a cost-benefit analysis reveals that a $50,000 software and hardware investment will return $8000 in net benefits after deducting costs. The ROI is thus 16%. If the firm's cost of capital is 12%, EVA would be $2000, since: EVA = $8000 - ($50,000 x 12%) = $2000. We could also deduct the 12% cost of capital from 16% (the ROI percentage) and multiply by the total investment: 4% x $50,000 = $2000.

For Boise Cascade, EVA calculations are a simple, flexible and powerful decision-making tool for investment assessment. Robert Egan, IT Vice President of this Idaho-based paper company, used EVA to help compare the cost of keeping existing storage assets with the cost of replacing them with new storage devices that would have lower maintenance charges.

To illustrate changes in actual costs and investments, assume next that new storage costs $1 million, with maintenance charges of $100,000 per year. Annual maintenance expenses on the old network storage were $350,000. For purposes of this example, assume the new storage equipment offers no appreciable benefits or quantifiable innovations other than lower maintenance costs. "You wouldn't want to spend the million dollars just because the maintenance is lower," Egan says. "You would say, we're spending a million dollars, and yes the maintenance is lower, and by the way, we have a capital charge against the million dollars. So the maintenance has to be so much lower that it covers the capital charge."

Boise's cost of capital is calculated at about 16%, whose real cost savings of the new storage become: $1 million @ 16% = $160,000. This cost must be added to the $100,000 maintenance fees if Boise invests in the new storage, so the total comparative cost is $350,000, versus $260,000. "If you didn't pay attention to the cost of capital, you're saying the million dollars is free," Egan says. "In this case, have you lowered the operating cost enough to make up for spending the capital?" The answer is yes, with $90,000 per year in cost savings.

Another way to directly calculate EVA in this case is to subtract the benefits (the maintenance savings the company would gain with the new storage) from the new investment and cost of capital: $250,000 - ($1 million x 16%) = $90,000. Boise probably would not have still forged ahead if the resulting cost savings were negative since it could have gotten by with its existing storage infrastructure until the new storage investment proved EVA-positive. In practice, however, EVA often is initially negative, but compelling reasons arise to make the capital investment anyway. This situation arose, for example, with Manitowoc's recent investment in a PeopleSoft HR system. Pecquex, Manitowoc's CEO says the company doubled in size during the past two years by acquiring several foreign companies and ran the assessment numbers to determine EVA early on. Manitowoc went ahead with its investment anyway since EVA moved positive substantially, approximately 150%, several years out as the up-front costs were eliminated and the asset base depreciated.

Stern Stewart favors not automatically dropping all projects with early negative EVAs, and will accept low initial results, as long as the trend is moving toward positive. This precept actually reinforces a fundamental EVA principle. Its importance is not reflected in a single calculation at a specific time. Rather, the goal should always be increasing EVA from month to month or fiscal year to fiscal year.

The operating approach starts with assets and builds up to invested capital, including adjustments for economically derived equity equivalent values. However, the financing approach starts with debt and adds all equity and equity equivalents to derive invested capital. Also, the weighted average cost of capital, based on the relative values of debt and equity and their respective cost rates, can help arrive at the cost of capital to multiply by the capital employed and deducted from the NOPAT value--resulting in the current period's EVA.

EVA is more than just a metric; it is a way to manage a business. CIOs might roll their eyes when they hear phrases like "cultural shift" and "corporate philosophy," but EVA can have powerful effects on IT management. It keeps everyone focused on wringing the most benefit out of the capital asset base. "It's got to be part of the blood of every member of my organization," Pecquex says. "We're building these words into practices" [Berry, 2003 pp. 2-3].

Assessing Human Capital Using EVA Techniques

Human capital represents a critical aspect of all firms' success, and assessing employee performance using EVA techniques can contribute greatly to such success. Some key competencies using EVA that differentiate superior performers in almost every position include:

* Concern for quality -- Monitor work, systems, and process and act to ensure that they meet or exceed standards;

* Flexibility -- Respond quickly to change and easily considering new approaches;

* Influence -- Effectively impact organizations, persuade and gain others' support;

* Initiative Proactively identify and act on problems and opportunities;

* Integrity and truth -- Gain the trust of others by taking responsibility for one's own actions and telling the truth;

* Service orientation -- Commit to satisfying internal and external customers;

* Teamwork -- Work together with others and helping them to work cooperatively to accomplish objectives; and

* Results orientation -- Focus on achieving desired results and setting and achieving challenging goals.

Many positions also require innovation and analytical and conceptual thinking as critical competencies. Ideally, firms should analyze competency by job function and level to determine exactly key strengths and weaknesses. Moreover, managerial competency relates to supervising people and the management of projects and tasks. Thus, managers need to be strong at:

* Establishing focus -- Align people and allocating resources consistent with entity objectives;

* Developing others -- Use a variety of approaches to help others develop their capabilities;

* Motivating others -- Enhance others' commitment to their work; and

* Organizational savvy -- Understand and use organizational dynamics to achieve objectives.

To assess leaders' competence, EVA users should recognize some key differences between leading and managing. Leading involves a level of responsibility beyond that of managing projects and supervising people. It requires the ability to inspire people, bring them together, develop vision and strategy, and communicate inside and outside the organization in ways that move it forward. Some leadership competencies include:

* Building organizational commitment -- Acting to support the organization toward the achievement of its mission and objectives.

* Change management -- Taking responsibility for leading, directing, and managing organizational change.

* Strategic thinking -- Using an understanding of competitive position to develop both short and long-term strategy.

* Visionary leadership -- Developing, articulating, and implementing a vision that leads the company toward its mission. Firms should assess leaders on these competencies. A Fortune 100 user found through the EVA process that of its 150 most senior executives, almost all managed excellently, but few were strong leaders [Zwell and Ressler, 2000, p. 40].

Developing a Human Capital Strategic Plan

Ideally, a human capital strategic plan should include all aspects of managing entity employees: hiring, appraisal, employee development, succession planning, promotion, training, retention, compensation and reengineering. Hiring processes should use the key competencies as the primary selection criteria. (Of course, candidates should have the requisite level of technical competence to qualify for consideration.) Appraisals should evaluate employees on those same competencies, and make them the focus of development and improvement. Training should also focus on improving competencies. (Research has shown that competency-based training has a much higher ROI than skill-based training.)

Succession planning should be based on needed competencies, skills and experience for success in positions, encouraging potential candidates to improve their competencies and obtain the needed skills and experience for promotion [Zwell and Ressler, 2000, p. 41].

EVA in the Chemical Industry

Ravitz and Bova [2003] analyzed annual reports for entities before and after using EVA (on both a company- and industry-wide basis) in the chemical industry. They adjusted reported incomes for the weighted average cost of capital (WAC) to derive EVA values, finding that nearly 60% of the companies studied did not recoup their costs of capital. They also ascertained that most such companies that considered EVA analyses (e.g., DuPont, Engelhard, Georgia Gulf, and PPG Industries) had brighter financial prospects than those that did not (e.g., Hercules, Monsanto, and Wellman), primarily due to how such companies focused on prudent use of their capital bases.

EVA and the Current Economic Outlook

In our highly competitive economic environment, despite some improving economic results, U.S. companies employ 2.7 million fewer people now than it did when the recession started in March 2001 [Fox and Bernasek, 2003 p. 73]. EVA forces increased analysis before companies hire more employees, since management must now better justify their use of all capital--including human capital. In large measure, EVA helped to increase second quarter of 2004, hourly productivity rose by an annual 6.8% rate.

Analyzing Corporate Culture: An Empirical Study

Corporate culture affects how people can optimize their current levels of competency. For example, while executives often say they want their salespeople to have strong teamwork skills--an EVA concept--sales compensation plans reward salespeople for their own individual sales only. To help analyze some actual affects of using EVA and economic value alignment, we review a Stern Stewart Company [2002] study to develop some suggestions for using these concepts. They studied 60 international companies (see Appendix A) in diverse industries (see Table 1 for a globally diverse group) to analyze companies that do and do not use these concepts.

To help determine the best global practices in aligning managers and employees to deliver shareowner value, we first define Corporate Governance as the laws, policies, and procedures that ensure that firms are run in the owners' interest and that scarce resources are allocated, managed and redeployed to maximize productivity and value. At the board level, governance involves board composition and incentive, transparency and disclosure, proxy contests, hostile takeovers, the glare of media attention and criminal penalties. But, so that local governance can supplement board governance, companies should inquire from management level governance:

1. What are the best practices in getting managers to think and act like owners?

2. Which management processes, organizational structures, and incentive plans produce superior financial returns?

3. How can top executive leadership and attitudes help create--or destroy--shareholder value?


Value-aligned companies derived a 20% higher total shareholder return than did non-aligned ones. For the five years ending in 2000, their 16% average annual excess shareholder return exceeded the non-aligned companies' negative 4% corresponding value. They also consistently outperform non-aligned ones in the five key dimensions of international corporate governance: leadership, culture and organization, incentive, management reporting, and decision-making. They were also consistently in the top 25th percentile on these dimensions, and 67% of the value-aligned leaders consistently communicate and celebrate business successes, while only 29% of non-aligned companies put much emphasis on communicating and celebrating business successes. Some top executives commented that "business has to be fun," "I always found celebrations were a great way to energize an organization" and "the smallest victories should be celebrated."

Value-aligned companies clearly define success, having unambiguous goals and value-centric metrics. Half of the value-aligned companies focus on value-based metrics, with other metrics for analysis and control, compared to 9% for non-aligned companies. Value-aligned companies monitor earnings and assets at many levels, which give a better line of sight and accountability (see Figure 1).

Figure 2 shows that value-aligned companies share data widely, empowering people at all levels to make better decisions.

Value-aligned middle managers are economically literate and more business savvy; the survey shows that 53% of middle managers in value-aligned versus 18% in unaligned companies take an economic view of short and long term operating financial results; 33% of the value-aligned middle managers indicated that they understand the business model, value proposition, and key strategy elements, compared to 11% of their unaligned counterparts. Innovation and growth in value-aligned companies is more likely to come from within; 60% of value-aligned companies highly encouraged internal new business creation as compared to 18% for unaligned companies. Failure was viewed as a form of learning in 93% of the value-aligned companies as compared to 47% in unaligned companies.

Value-aligned companies offer the unlimited upside potential of an owner by not capping bonuses; 73% of value-aligned companies do not cap bonuses, compared to 29% of the non-aligned. Uncapping bonuses usually indicates that board or top management want a "culture of ownership" and have confidence in the performance metric. Gaming behavior is discouraged by granting bonuses that deviate from budgets, resolving time horizons and enhancing the ability to stimulate long run payoffs is. Table 2 illustrates how aligned firms enhance accountability and line of sight by focusing bonuses on only one or two key value metrics.



Traditional incentive plans often turn planning into negotiations, and counter "stretch thinking." While 27% of the value-aligned group strongly agree or somewhat agree (as do 58% of the non-aligned group) with the question, "Do your managers sandbag or negotiate their annual plans to make it easier for them to earn a bonus?" When asked "why the game is played," Jack Welch (Welch and Byrne, 2001, p. 385) stated that over the years, people everywhere have learned that if you made your number, you got a pat on the back or better, and if you miss your budget, you would get a stitch in the eye or worse.

Many value-aligned companies break the link by seeking performance targets by formula, not plan numbers; 20% of value-aligned senior or corporate managers used annual or strategic plans to set targets versus 51% for unaligned senior corporate managers. A similar pattern arose in the responses for all other management levels and non-management levels such as the sales force.

A total of 73% of value-aligned companies answered yes, versus 49% for unaligned companies to the question "Is any part of the annual cash bonus dependent on cumulative performance over a period of years?" Again, this shows that value-aligned companies create an ownership culture by structuring bonus payments to make managers think long term. They also give managers tools and reports to stimulate long-run bonuses; 47% of senior corporate managers versus 18% for unaligned companies said that they were able to stimulate three- to five-year bonus awards as they vary key plan assumptions. A similar relationship existed between value-aligned versus unaligned lower level managers and non-management groups.


Companies were asked to categorize themselves as (1) value-centric (Is value the dominant criterion for decisions and resource allocations?); (2) focused (Do you rely on a select few measures to simplify decision-making and enhance communication and accountability?); or (3) integrated (Do you concentrate on the same set of measures to unite all key processes?). Most companies limit capital expenditures and allocate capital for reasons other than value; 59% of respondents said that when the capital pool was limited, projects were funded on value and other factors; 19% said projects were funded on value; 12% said that all value-adding projects were funded; and 10% said that projects were funded by negotiations with corporate headquarters. However, value-aligned firms tend to focus resources more purely on value-creating outcomes; 72% of value-aligned firms funded all projects on value, compared to only 18% of unaligned firms.

Most firms lack a simple and well-integrated management framework, as few measures span and link key processes. Overall, financial measures are much more integrated than operational measures as is indicated in Figure 3.


Economic profit/EVA was the measure both groups used most consistently to span reporting, planning and incentives. As Figure 4 indicates, value-aligned companies were slightly higher in their average overlap of economic profit across short term planning, reporting and compensation. More effective planning is also more efficient.

Value-aligned companies had a 3.8-month strategic planning cycle time versus 4.9 for unaligned companies. The cycle time for the annual plan was 3.3 for value-aligned versus 3.9 for unaligned. Value-aligned companies are more likely to innovate even if it means temporarily depressing earnings, 60% of value-aligned versus 42% of unaligned companies. In contrast, value-aligned companies were more likely to sell a unit at a loss. If a low-return unit could be sustained by continued investment or could be sold below book value for its worth, 80% of value-aligned versus 64% of unaligned stated that they would sell the unit for a loss.

Methods of Applying EVA

The following examples show how EVA can be used to improve operations and to achieve management goals. Table 3 is the basic information that will be used as a starting point to illustrate various strategies.

Table 4 illustrates how management can increase EVA by cutting costs.

Table 5 illustrates how management can increase EVA by increasing sales at a greater rate than the increase in costs.

Table 6 shows how to increase EVA by more efficiently managing assets, e.g., applying contribution margin and other efficiencies to determine better uses of assets.

Table 7 is taken from Duke Energy's financial statements and illustrates how this well-known energy company applies EVA to better measure and achieves high returns to its shareholders.

Duke's MVA Closely Tracks its EVA

* In theory, MVA represents expectations of future EVA;

* However, investors will typically extrapolate future EVA off the prior EVA track record; and

* As a result, there is often a close association between EVA and MVA movements.

Enron Example

Enron aimed at the wrong target and got what it paid for--an EPS win but an EVA loss, (see Table 8). "Enron's performance in 2000 was a success by any measure ... The company's net income reached a record in 2000. Enron is laser-focused on earnings per share, and we expect to continue strong earnings performance." (From Enron's, 2000 Annual Report letter to shareholders.)

This analysis shows that Enron was in trouble as early as 1998. Its net income and EVA moved in opposite directions, but many people ignored this EVA data.


EVA measures many ways to improve performance and wealth created in any business. It ties quietly to net present value and shareholder wealth. Entities should use EVA to unite and value link all planning, managing, and decision-making processes. Worldwide standard-setting bodies around should consider requiring EVA as the basis of reporting the results of operations. We have demonstrated that shareholders would be much better informed if EVA were used in reporting to them and other stakeholders.


Participating Companies

Allied Waste Industries, Inc

Argosy Gaming Company


Bausch & Lomb

Best Buy

Bradley Pharmaceuticals

Briggs & Stratton Corporation


Choice Point

CLP Holdings Ltd

Conocco Inc.

Construtora Andrade Gutierrez

Corporacisn Nacional del Cobre De


DESC S.A. de C.V.


Emera Inc.

Equity Office Properties Trust

Femsa Servicios S.A. de C.V.


Gleason Corporation

Griffith Laboratories Inc.


Grupo Elektra, S.A. de C.V.

Grupo IMSA

Grupo Industrial Saltillo S.A. de C.V.

Heerema Holding Construction, Inc.

Herman Miller

Johnsonville Sausage, LLC

Jollibee Foods Corporation

Kimberly-Clark Corporation

Knape & Vogt Manufacturing Company

Lydall, Inc

The Manitowoc Company, Inc.

Material Sciences Corporation

The McGraw-Hill Companies

Metro AG

National Australia Bank Limited

New Clicks Holdings LTD

Northrop Grumman Coproration

Parker Hannifan Corporation

Petroleos Mexicanos


Grupo Posadas

PSA Corporation

Purdue Pharma

Rochester Gas and Electric Corporation

Royal Bank Financial Corporation

RR Donnelley & Sons

S & C Electric Company

Schnitzer Steel Industries

Singapore Power Ltd

Sirona Dental Systems

Souza Cruz

Sprint Corporation


Telstra Corporation Limited

Thus PLC

TimeMed Labeling Systems, Inc.

Vitro Corporativo

W.C. Bradley Co.


Armitage, Howard M.; Wong, Ellen; Douglas, Allan. "The Pursuit of Value," CMA Management, Hamilton, 77, 7, Nov 2003, pp. 34-5.

Berry, John. "How to Apply EVA to IT; Looking at IT Investments Through the Lens of an EVA Analysis Can Help Quantify and Demonstrate Their Value in Language your CFO Will Understand," CIO, Framingham 16, 7, January 15, 2003, pp. 1-3.

Enron Corporation. Enron 2000 Annual Report.

Fox, Justin; Bernasek, Anna. "Things are Looking Up Unless You are Looking for a Job," Fortune, New York 148, 6, Sep 29, 2003, pp. 73.

Prober, Larry M. "A Better Financial Reporting Tool," Pennsylvania CPA Journal, Philadelphia 71, 3, Fall 2000, pp. 27-34.

Ravitz, Leslie C.; Bova, Anthony. "Financial Insights: EVA Trends in the Chemical Industry," Chemical Market Reporter, New York 264, 11, October 6, 2003, pp. 13.

Stern Stewart and Company in Association with Hackett Benchmarking and Research, a Division of Answerthink, SAI Study, New York: Answerthink; 2002, pp. 1-54.

Welch, Jack; Byrne, John A. Jack: Straight from the Gut, New York: Warner Business Books, 2001.

Zwell, Michael; Ressler, Robert. "Powering the Human Drivers of Financial Performance," Strategic Finance, Montvale 81, 11, May 2000, pp. 40-5.


*University of South Florida--St. Petersburg and **Wayne State University--U.S.A.
TABLE 1 Globally Diverse Participants

                <$100 MM        101-500 MM     501 MM-1 B

Revenue         11%             31%            13%

                Customer Focus  Innovation     Low Cost

Basic           80%             15%             5%

                Manufacturing   Services       Retail

Business        53%             18%             5%

                Public          Private        State-owned

Ownership       78%             14%             8%

                North America   America        Europe

Geography       54%             17%            12%

                                One and
                One             several minor  2-3

Principle       23%              5%            34%

                One             2-5            6-10

Number           8%             31%            21%
  of countries

                <1000           1000-4999      5000-9999

Employees        4%             27%            29%

                1.1-5 B        >$5B

Revenue         17%            28%


                Telecom        Finance  Oil/gas

Business        12%             7%      5%


                Asia           Africa

Geography       13%             4%


Principle       38%

                11-40          >40

Number          18%            22%
  of countries

                10,000-49,999  >50,000

Employees       33%


Number of Measures to Drive Compensation

                               1 (%)  2 (%)  3-4 (%)  5 or More (%)

Senior corporate managers      40     10     38       12
Senior business unit managers  33     15     31       21
Middle managers/front line     34     14     28       24
Non-management--sales force    21     38     26       15
Non-management--all other      42     33      8       17

Percent of Companies Using One or Two Measures to Drive Compensation

                               Non-aligned (%)  Value-aligned (%)

Senior corporate managers      49               79
Senior business unit managers  45               79
Middle managers/front line/    47               64
Non-management--sales force    50               83
Non-management--all other      61               91

TABLE 3 Basic Bonus Information

A Win-Win Bonus Plan Puts a Larger Weight on a Smaller, More Compact
Measure of Performance

Sales                         $100     1%
Operating costs & taxes         80
NOPAT                          $20     5%
Capital                       $150
x Cost of capital               10%
Capital charge                 $15
EVA (economic value added)      $5    20%
Increase in EVA @ 20% growth    $1   100%

TABLE 4 EVA Method #1: Improving Operating Efficiency

Sales                       $100   $100
Operating costs & taxes       80     79
NOPAT                        $20    $21
Capital                     $150   $150
x Cost of capital             10%    10%
Capital charge               $15    $15
EVA (economic value added)    $5     $6

Note: Cut costs, save taxes, increase efficiency and raise NOPAT without
raising capital.

TABLE 5 EVA Method #2: Profitable Growth

Sales                       $100   $120
Operating costs & taxes       80     88
NOPAT                        $20    $22
Capital                     $150   $180
x Cost of capital             10%    10%
Capital charge               $15    $18
EVA (economic value added)    $5     $6

Note: Invest capital, and grow, but earn more than the cost of capital.

TABLE 6 EVA Method #3: Manage Assets

Sales                       $100    $90
Operating costs & taxes       80     72
NOPAT                        $20    $18
Capital                     $150   $120
x Cost of capital             10%    10%
Capital charge               $15    $12
EVA (economic value added)    $5     $6

Note: Reduce capital that is earning a return less than the cost of

TABLE 7 Duke Energy EVA Example

Fortunes "Most Admired" Utility

EVA is the profit that remains after subtracting the cost of capital and
eliminating material accounting distortions
EVA is the dollar spread between the return on capital and the cost of

NOPAT               $3.3   ROTC                10.7%
Capital            $30.3   - Cost of capital    7.2%
x Cost of capital    7.2%  Spread               3.5%
- Capital charge    $2.2   x Capital          $30.3
= EVA               $1.1   = EVA               $1.1

EVA is the Real Key to Creating Wealth

MVA, or market value added, is shareholder wealth
MVA = market value - total capital
MVA = present value of EVA
Market value: MVA - total capital > EVA ... EVA ... EVA ... EVA

By Maintaining its Current $1.1 Billion in EVA Duke Would Create $15
Billion in Shareholder Wealth

$45.3 (Market value) = $15.0 (MVA) + $30.3 (total capital) = PV of
                                                             current EVA

(Numbers in billions of dollars) Duke Energy Annual Report 2001

Duke's Actual 2001 Value is $48.0 Billion, Indicating Investors Expect
Future Growth in EVA

Market value $48.0 = FGV $2.7
                    + MVA $15.0
                    + Total capital $30.3
Future growth value = PV of EVA growth
                    = PV of current EVA
                    = EVA/CoC
                    = $1.1/7.2%
Current operations value $45.3

TABLE 8 Net Income and EVA

      Net Income (Millions)  EPS   EVA (millions)

1996   600                   0.60     0
1997   100                   0.10    50
1998   700                   0.80  -200
1999   950                   1.05  -330
2000  1000                   1.18  -650
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Author:Lander, Gerald H.; Reinstein, Alan
Publication:International Advances in Economic Research
Geographic Code:4E
Date:Nov 1, 2005
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