Professional Documents
Culture Documents
EVA is a registered trademark of Stern Stewart & Co. The directors of Finegan & Gressle are former partners and officers of Stern Stewart who contributed significantly to developing and popularizing EVA.
Coca-Cola $124.1 ITT Microsoft 83.3 General Motors The Point: Coke and GM have identical trading values, Intel 85.0 Loews but GMValue $134.5 more than invested $200 billion Total Market 72.5 Merck Coke to get $135.5 American Express Total Market Value there. 10.4 Motor Company Capital Invested Phillip Morris 59.8 Ford During 5 years alone, Coke Capital Invested the last187.9 Travelers Group $124.1 Proctor & MVA generated $73 billion more in value than Gamble 54.5 MVA Exxon 51.5 ($52.4) RJR Nabisco could have been expected from the market 5-Year XVA $73.1 Johnson & Johnson in general. By contrast, GM destroyed $83 48.8 PG&E 5-Year XVA ($83.2) Chase Manhattan billion. 43.7 Phillips Electronics Pfizer 40.8 Digital Equipment
Source: Finegan & Gressle survey of the 1,700 largest companies traded on a U.S. exchange based on year-end 1996 data ($ Billions). A complete listing is available at www.shareholdervalue.com.
Corporate Office
Investor Relations
EPS
Asset Turns
No common denominator of value. Heavily dependent on corporate synthesis and reconciliation of departmental figures. Information transfers slow and inefficient.
Investor Relations
Treasury Management
Cost Accounting
No common denominator of value. Heavily dependent on corporate synthesis and reconciliation of departmental figures. Information transfers slow and inefficient.
Common language for allocating resources, conducting valuations, measuring performance, and communicating with investors. Minimal corporate synthesis and reconciliation. Information transfers real-time and meaningful.
Investor Relations
Treasury Management
Cost Accounting
No common denominator of value. Heavily dependent on corporate synthesis and reconciliation of departmental figures. Information transfers slow and inefficient.
Common language for allocating resources, conducting valuations, measuring performance, and communicating with investors. Minimal corporate synthesis and reconciliation. Information transfers real-time and meaningful.
Cost of Borrowing?
Dividend Yield? The return (or expectation) foregone by not investing in a comparably risky portfolio of projectsthe weighted cost of debt and equity capital. Opp. Cost = Cost of Capital x Beg. Capital
Beg. Capital
EVA introduces four powerful incentives: Improve efficiency, and thus returns. Grow, but only if new investments can earn the cost of capital. Redeploy capital from underperforming operations. Manage risk, and therefore the cost of capital.
PV NOPAT C
MVA
PV EVA2 PV EVA1
PV EVA3
Capital
The discounted present value of a companys expected EVA is its market value premium or discount to book value (MVA). A companys discounted EVA plus its level of capital employed will always equal the discounted present value of expected Free Cash Flow. EVA is the only integrated measure of growth and profitability which relates directly to stock value.
Measurement Challenges:
Differentiate substantive performance from bookkeeping: Acquisition accounting Write-offs and restructuring charges Off balance-sheet financing Expensing of long-term investments Capture the real cost of money: Cash-basis versus accrual accounting
Executive Talent
Decisive edge in value creation Highly sought
Strategy: Use performance-based pay to attract top talent and and encourage value creation
The Reality: Most incentive plans arent designed to drive value creation
Stock and Options
Linked to stock price Competitive Line of sight often poor No focus on goals
Cash Incentives
Mainly annual EPS, ROE goals, capped Weak link to value Battles over fairness
Value-based plans, in contrast, clearly link decisions, results and shareholder value.
Tar
Key Features:
No caps (or floors) A bonus bank Greater leverage
Tar
portion of award
rf r ance Tar et
Key Features:
No caps (or floors) A bonus bank Greater leverage
Tar et
$80
PV EVA PV EVA
MVA
EVA C
Current EVA Capitalized
$ 30 $100
Capital
$ 50
NOPAT - c* x C = EVA
Business Unit
American Single line of business Global competition Weak link to UK share price Performance units/shares and bonus based upon unit EVA
Performance Metric
1) V V C c* = C + (NOPAT - c* x C)/c* = enterprise value based upon current results = Capital = Cost of capital
Business Unit
Diverse units Balance of unit focus and corporate-wide teamwork Phantom stock Corporate and business unit grants
Rollout
Evaluate Results
Product Margin
Total Costs
Variable Costs
Period Costs
Product Margin
Total Costs
Volume
Weighted Margin
Variable Costs
Period Costs
Retained Accounts
New Accounts
Product Margin
Total Costs
Volume
Weighted Margin
Variable Costs
Period Costs
Retained Accounts
New Accounts
Grade Ratio
Grade Margin
Premium
Mid-Grade
Regular
Product Margin
Total Costs
Volume
Weighted Margin
Variable Costs
Period Costs
Retained Accounts
New Accounts
Grade Ratio
Grade Margin
Premium
Mid-Grade
Regular
Premium
Mid-Grade
Regular
EVA
Cost of Capital
Cost of Debt Cost of Equity Capital Charge Fixed Capital Capital Employed Property Inventory Working Capital Receivables Payables Good Will Intangibles Plant & Equipment
Legend:
Other
Common Concerns:
We have too many initiatives already underway; this will just confuse everyone. Its too complicated; nobody will understand it. Were already very successful, so why do we need this? Im investing for the future, but youre measuring todays returns.
You cant compare my SBU to SBU X, were different. We should formulate our strategy first and decide where were trying to go before we start measuring performance. We just convinced everyone that Return on Capital is the most important measure to evaluate performance.
The End