Mr. Zaboschuk

2296 Words Sep 8th, 2014 10 Pages
No Risk No Reward
EVA Compensation Tools

Paper Four:
An Analysis by Wes Zaboschuk

Compensation Strategy for the New Economy Age

How to Structure Incentive Plans that Work

Stern Stewart Research

Submitted to Dr. Juan. Cachanosky

Overview of Central Theme of Articles:
Choosing a compensation plan that allows a company to encourage long-term devotion of a manager is a challenge for many companies. The advances in technology have created New Economy service driven firms that often don’t have traditional tangible assets like buildings and capital equipment. When the nature of economic output changes, the question must arise, should accounting practice be
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If a corporation can get all stakeholders to act in unison together, one can change the mindset of managers to make decisions that impact the value of the company. Using EVA measures does not come without it shortcomings. One shortcoming is that introducing a system of complex formulas to calculate the increase in EVA might intimidate managers to the point of “analysis paralysis”. A focus on financial measures and of using the economic notion of opportunity cost to shareholders and the 10% premium that capital should bring to a company is in one sense hypocritical. On the one hand, Stern and Stewart are stating that the shortfall in compensation systems is that too many managers look at what others are making, yet the very premise of EVA suggests that one must look at the opportunity cost of using shareholders money in other markets that would give an equal or greater return.
The other expected return cannot be determined unless one is looking at other markets and how much return one can achieve in those markets. I liken this to someone owning a home. It is very typical for a homeowner to want to buy a house when the market is low and then make a profit. Most individuals do take out mortgages in order to carry out such a large investment. During the
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