April 9, 2019
Pay-for-Performance: ISS Gives More “EVA” Context
– Liz Dunshee
ISS research reports now include four “Economic Value Added” metrics in the pay-for-performance analysis. I’ve blogged a couple of times about whether investors are using that info – and how to incorporate the metrics into plans (if at all). This latest ISS memo – which is posted on the proxy advisor’s “EVA Resource Center” – gives more context on how these metrics are defined and why ISS thinks they’ll help shareholders better evaluate the alignment between pay & performance. Here’s an excerpt:
At its essence, EVA is a simple three-line calculation – it is sales, less all operating costs, including taxes and depreciation, less a full weighted-average cost-of-capital charge on all the capital, or net assets, used in business operations.
EVA recognizes investors’ needs by deducting a required return on capital before it counts profit. To increase EVA, managers must increase profits above the opportunity cost of funding any new capital investments. EVA naturally holds managers accountable as stewards of investor money.
NOPAT (Net Operating Profit After Tax) and Capital also incorporate the standard set of adjustments. For example, they exclude excess cash and the related investment income, and reflect writing off R&D over time instead of expensing it. EVA is thus a better indication of how well a company’s business is performing from a strategic perspective.