In this article, the authors describe a simple but sophisticated four-step process for adjusting the widely relied on operating manager’s incentive compensation performance metric of earnings before interest, taxes, depreciation and amortization (EBITDA) to align with the shareholder-oriented economic profit metric. The approach, which is termed EV-Pay, follows three principles: (a) any incentive compensation plan must be understood by and relevant to operating managers, (b) it should reward managers for earnings that exceed a risk-adjusted return on capital, and (c) it should be based on the economic profits that accrue to shareholders. The EV-Pay process operationalizes the economic profit construct for incentive compensation purposes in corporate environments where economic profit is not otherwise used.
Purdum, T. ( 2005). Lost in translation. Industry Week, 254(9), 41-43.
2.
Lawler, E., & Dysart, T. ( 2006). Tenth Annual Corporate Board Effectiveness Study 2006-07 . Retrieved from http://www.heidrick.com/NR/rdonlyres/723D125E-97464486-829A-D49A8AF0832B/O/HS_BoardEffectivenessStudy0607.pdf
3.
Hay Group. (2009). The Wall Street Journal/Hay Group 2008 CEO Compensation Study reveals companies dialed back pay levels in 2008. Retrieved from http://www.haygroup.com/ww/Press/Details.aspx?ID=15515
4.
See Purdum (2005), p. 41.
5.
Schiehll, E. , & Andre, P. (2003). Corporate governance and the information gap: The use of financial and non-financial information in executive compensation. Ivey Business Journal Online, March/April, 6-12.
6.
England, J., & Todd, P. ( 2007). Looking ahead: Ten trends in executive compensation. Retrieved from http://www.towersperrin.com/tp/getwebcachedoc?country=global&webc=HRS/USA/2007/200711/Looking_Ahead.pdf
7.
Smith, P. (2009, May 2). Macquarie chief suffers steep cut in performance-related pay. Financial Times, p. 10; MacNamara, W., & MacKenzie, K. (2009, April 17). BP rebuked for executive pay. Financial Times, p. 18; Hall, B. (2008, October 8). Sarkosy orders companies to curb executive rewards. Financial Times, p. 2; Benoit, B. (2008, July 10). Germany to focus on stock options in clampdown on executive pay. Financial Times, p. 13; Betts, P. (2008, April 1). Dutch shareholders crack down on corporate bonuses. Financial Times, p. 14; Anderson, R. (2009, April 8). Chief quits in Finland bonus furor. Financial Times, p. 10.
8.
Reuters. (2007). House votes to give investors say on executive pay. Retrieved from http://www.nytimes.com/2007/04/21/business/21pay.html
9.
Schumer, C. ( 2009). Schumer, Cantwell announce "Shareholder Bill of Rights" to impose greater accountability on corporate America. Retrieved from http://www.schumer.senate.gov/new_website/record.cfm?id=313468
10.
Dvorak, P., & Scannell, K. ( 2009). Investors, take note: New bill to target boards, "say-on-pay." Retrieved from http://www.online.wsj.com/article/SB124061794487355095.html
11.
O’Byrne, S., & Young, S. (2006). Why executive pay is failing. Harvard Business Review, 84(6), 28.
12.
Lorsch, J., & Khurana, R. ( 2010). The pay problem. Harvard Magazine , May-June, 30-35.
13.
Glassman, M. , Glassman, A., Champagne, P., & Zugelder , M. (2010). Evaluating pay-for-performance systems: Critical issues for implementation . Compensation & Benefits Review, 42(4), 231-238.
14.
Flynn, S. (2009). Perverse incentives. Retrieved from http:// www.forbes.com/2009/02/19/incentives-compensation-bonuses-leadership_perverted_incentives.html; See also Yancey, G. (2010). Aligning the CEO’s incentive plan with criteria that drive organizational performance. Compensation & Benefits Review, 42(3), 190-196.
15.
See Purdum (2005), pp. 41-43.
16.
Ryan, V. ( 2008). ROC solid. CFO, June, 25-26.
17.
Karame, M. ( 2003). Pure performance. Retrieved from http://www.idgcapitalgroup.com/pdf/American%20Executive%20Nov%202003%20Issue%20Pure%20Performance%20by%20Marwaan%20Karame.pdf
18.
Heilman, J. ( 2006). Time to rethink performance metrics and valuation methods . Chief Executive, October/ November, 39.
19.
Morris, J. (2002). How much is a CEO worth? Euromoney, July, 142. See also King, A. (2001). Warning: Use of EBITDA may be dangerous to your career. Strategic Finance, 83(3), 35-37.
20.
Null, D., & Cenatempo, D. ( 1997). Paper company strategies should focus on building economic value. Pulp & Paper, 71(9), 59-67.
21.
See Karame (2003).
22.
See Null and Cenatempo (1997), p. 59.
23.
Tully, S. ( 2006). Five commandments for paying the boss. Fortune, 154(1), 89.
24.
Coletta, C. ( 2008). CEO’s pay jumps despite R. H. Donnelley’s stock crash. http://www.bizjournals.com/triangle/stories/2008/04/07/daily11.html
25.
See Heilman, J. (2006); Hodak, M. (2005). Letting go of the norm: How executive compensation can do better than "best practices." Journal of Applied Corporate Finance, 17(4), 115-124; Bergfeld, C. (2008). Target CEO pay: One comp formula that works. Retrieved from http:// www.industry.bnet.com/retail/100024/target-ceo-pay-one-comp-formula-that-works/; and company websites accessed.
26.
Stein, P. ( 2010, January 23). Lessons from Singapore on bank bonuses. The Wall Street Journal Online.
27.
Baum, C., Sarver, L., & Strickland, T. (2004). EVA, MVA, and CEO compensation: Further evidence. American Business Review, 22(2), 82-87. See also Hodak (2005).
Bendle, N., Farris,P., Pfeifer, P., & Reibstein, D. (2010). Metrics that matter to marketing managers. Marketing Journal of Research and Management, January, 5-10. For concurring data, see Durfee, D. (2004). Better carrots? CFO, July, 41-44.
30.
McDonnell, C. (2005). Business planning requires information and integration. Accountancy Ireland, 37(1), 66-67.
31.
See McKenzie and Shilling (1998), p. 59.
32.
Petit, J. (1998). Governing for value. Ivey Business Quarterly, 63(1), 49-53. See also Hodak (2005); see also Ellig, B. (2010). Annual incentive plan formula considerations. Compensation & Benefits Review, 42(4), 222-230.
33.
This is a point strongly posited for EVA™ by Stewart, B. (2004). It’s the metrics that matter. Directorship, 30(9), 8-10.
34.
Riceman, S. , Cahan, S., & Lal, M. (1998). Managers perform better under EVA bonus schemes?SSRN working paper.
35.
This point is also attested to in Ellig (2010).
36.
Chen, S., & Dodd, J. ( 2001). Operating income, residual income, and EVA™: Which metric is more value relevant?Journal of Managerial Issues , 13(1), 65-86.
37.
See McKenzie and Shilling (1998); see also Durfee, D. (2006). Pay daze. CFO, December, 69-73.
38.
Dash, E. ( 2010, January 26). Ailing banks favor salaries over shareholders . The New York Times.
39.
The New Shorter Oxford English Dictionary, p. 259.
