The Advisors' Blog

– Liz Dunshee

Here’s a memo from ISS about how – and why – its research reports now include four “Economic Value Added” metrics: Margin, Spread, Sales Momentum, and Capital Momentum (companies can view their EVA calculations in a free “EVA Profile” – here’s a mock-up of what that looks like). Last month, I blogged about using EVA measures in plans. I said:

We don’t know yet whether investors will develop a preference for EVA-based plans. It stands to reason that having the ISS data point will move everyone in that direction – but customization might be necessary.

Well, Pearl Meyer went out and asked companies whether their investors were requesting a strong emphasis on EVA measures – and they’re back with the results: over two-thirds said they’d received no feedback from investors indicating that they prefer EVA concepts to be included in incentive plan design.

Jim Heim adds this color – and suggests things comp committees should be talking about right now instead of EVA (e.g. modeling the impact of a downturn on pay programs):

We believe that EVA is a shortcut that doesn’t consider nuance. A better methodology would tailor the performance lens based on sector-specific, cycle-specific, stage-specific, and even company-specific factors. If EVA actually reflected these dimensions, we would see EVA more widely embraced across sectors.

For example, it would be inappropriate to compare EVA between two comparable organizations where one is engaged in an acquisition strategy or has embarked upon a large capital project. Furthermore, cost of capital is a function of balance sheet management. Therefore, a company that has an acquisition will appear worse from an EVA standpoint in the short term (e.g., three years) as compared to a company that buys back stock.