EVA® and Value-Based Management

Today's Most Comprehensive and Unbiased Evaluation of Value-Based Management and EVA

Economic Value Added (EVA) and Value Based Management (VBM), despite persistent claims to the contrary, are not magic wands, guaranteeing instant success. Instead, they are a set of management tools — powerful tools, to be sure, proven to work in case after case — for creating and augmenting shareholder value.

And as with any tools, users will achieve the greatest success only by learning and understanding both their strengths and weaknesses. EVA and Value Based Management is the first book to fully explain all sides of EVA and VBM, and cover the critical factors in harnessing EVA and VBM to build shareholder value. It provides in-depth coverage of the key steps in implementing EVA, including:

• Determining your cost of capital
• Using accounting adjustments to make EVA a better measure of performance
• Identifying value drivers to guide performance improvement
• Tying management compensation to EVA

The sustained creation of shareholder value doesn't happen by accident — it happens because companies plan for it. Let EVA and Value Based Management give you the clear, concise, and up-to-date information you need on EVA and VBM ― what they are, why they work, and how they can work for you — and then show you how to use that information to reach your own informed conclusions.

• Part One: Understanding EVA
1. Value Creation and Economic Value Added
• Why Shareholder Value, and Why Now?
• A Case in Point: Europe and the Shareholder
• Value Revolution
• Value Creation and Stakeholders
• A Brief Word on Value-Based Management versus EVA
2. Implementing EVA
• Valuation Principles
• Discounted Cashflow
• Internal Rate of Return
• Market Value Added and Excess Return
• Market Value Added
• Excess Return
• EVA Is the Solution
• Calculating EVA
• The Working Capital Requirement
• A Case Study of MVA/EVA Calculations
• Harnischfeger's MVA
• Harnischfeger's EVA
• Comparing Excess Returns, MVA, and EVA: Evidence from the United States and Europe
• Creating Value
• Increased Returns on Existing Capital
• Profitable Growth
• Divestment of Value-Destroying Activities
• Longer Competitive Advantage Period
• Reductions in the Cost of Capital
• A Final Note
• Conclusion
3. Implementing EVA
• An EVA Success Story: The Case of SPX
• What Do Managers Do in EVA Companies?
• EVA and Culture Change
• The EVA Implementation Process
• A Profile of Successful and Unsuccessful Users
• Common Problems in Implementing EVA
• The Underinvestment Problem
• The Synergy Problem
• Controllability: A Closer Look
• The Synergy and Controllability Problems: Potential Solutions
• Isn't EVA Just Good Management? What's So New about It?
• The Cost of Capital
• Accounting Adjustments
• Management Compensation
• Conclusion
4. Management Compensation
• The Basic Objectives of Management Compensation
• Aligning Management and Shareholder Interests
• Wealth Leverage: The Key Measure of Management Incentives
• Creating Strong Incentives: The Management Buyout
• The Shortcomings of the MBO Model
• The MBO Aftermath: A Dramatic Rise in Stock Option Grants
• Retention Risk and the Competitive Pay Model
• Bonus Plan Design in the Competitive Pay Model
• EVA: A Better Way to Pay Managers
• The Original EVA Bonus Plans
• The Modern EVA Bonus Plan
• The Limitations of EVA-Based Compensation
• Different Risk Preferences
• Cyclical Industries
• Start-Up Ventures and Emerging Markets
• Money Isn't Everything
• Cultural Differences
• Alternatives to EVA
• Equity Carve-Outs
• Tracking Stock
• Conclusion
• Part Two: Making It Work: The Technical Side of EVA
5. The Cost of Capital
• What Is the Cost of Capital?
• Calculating WACC
• The CAPM
• What Is BETA?
• Calculating BETA for a Publicly Traded Company
• Why Is BETA Controversial?
• The Market Risk Premium Debate
• Estimating BETAs for Private Firms and Divisions
• Organized Geographically
• Organized by Product Line
• Limitations of the CAPM
• The Arbitrage Princing Model Alternative
• Financial Strategy and Value Creation
• Tax Shields
• The Costs of Financial Distress
• Other Influences on Capital Structure
• Agency Costs
• Asymmetric Information
• The Pecking Order Theory
• Achieving Capital Structure Targets
• Capital Structure Does Matter
• Conclusion
6. EVA
• The Major Accounting Adjustments
• Successful Efforts Accounting
• Research and Development (R&D)
• Deferred Tax
• Provisions for Warranties and Bad Debts
• LIFO Reserves
• Depreciation
• Goodwill
• Operating Leases
• Restructuring Charges
• Accounting for the Capital Charge
• EVA Accounting Adjustment Process
• A Framework for Thinking about EVA and Accounting Adjustments
• REVA: An Alternative to Accounting-Based EVA
• Explaining Stock Market Returns: Is EVA Really Better?
• Summing Up
• Conclusion
7. Value Drivers
• EVA and the Synergy Problem
• Value Drivers and EVA
• Value Drivers: The Financial Perspective
• DuPont Analysis
• Value Drivers: The Nonfinancial Perspective
• The Importance of Nonfinancial Drivers
• Future Growth Opportunities and Value Drivers
• The Balanced Scorecard
• Finding the Right Value Drivers
• Value Drivers and Compensation
• Using Value Drivers: Critical Success Factors
• The Balanced Scorecard: A Final Warning
• Conclusion
• Appendix
8. Management Compensation Revisited
• EVA Bonus Plan Calibration
• Expected EVA Improvement
• The EVA Interval
• The Calibrated Bonus Formula
• Setting EVA Improvement Goals for Divisions
• The Actual Bonus Plans of EVA Companies
• Companies Combining EVA with Other Measures
• Companies Using EVA Only
• When It All Goes Wrong: The Abandoners of EVA
• Why Did They Leave?
• Those Who Left versus Those Who Stayed
• Competitive Compensation Analysis
• Peer Group
• Matching Jobs
• Elements of Compensation
• Total Direct Compensation
• The Problem of Lumpy Pay
• Pay Inflation
• Size-Adjusted Compensation
• Total Wealth Leverage of Corporate Officers in EVA Companies
• Wealth Leverage of Stock and Options Held
• Wealth Leverage of Current-Year Compensation
• Wealth Leverage of Future Compensation
• Total Wealth Leverage
• The Importance of Option Grant Guidelines
• The Impact of Stock Compensation on Business Unit Wealth Leverage
• Conclusion
• Appendix
9. The Metric Wars: EVA versus Cashflow Return on Investment
• What Is CFROI?
• How Is CFROI Calculated?
• The CFROI Valuation Model
• The CFROI Valuation Model: A Case Study
• Calculating CFROI Using Financial Statements: Harnischfeger Industries
• Why Don't We Just Calculate a Simple Return?
• CFROI and Inflation
• The CFROI Fade: The Evidence Isn't Convincing
• Another Problem with the Fade: It May Imply Negative NPV Investments
• Where the Fade Doesn't Apply
• The Sustainable Growth Rate
• The Holt/BCG Critique of EVA
• Corporate Uses for CFROI
• CFROI and Management Compensation
• Conclusion
• Appendix
10. Understanding the Metric Wars
• Comparing the Metrics: A Case Study
• Residual Income Components
• Residual Income Measures
• Market-Based Measures
• Cashflow Measures
• A Perspective on the Performance Measurement Alternatives
• Conclusion
• Part Three: Conclusions
11. Lessons Learned, and the Future of Economic Value Added
• What Next?
• Bibliography

A very good introduction to EVA and VBM, even though it is a bit dry.