Economic Value Added (EVA) is a measure of a business enterprise’s economic performance based on what is added to that enterprise’s value by its operating earnings (net of tax) reduced by the enterprise’s “capital costs.” The concept of EVA was introduced in the 1980s by the management consulting firm of Stern Stewart & Co. That firm obtained a trademark for the term EVA and subsequently transferred it to Stern Value Management, Ltd. Today’s column discusses recent developments in EVA, how the EVA formula works and the use of EVA as a performance metric in executive incentive compensation plans.
Recent Developments in EVA. On February 12, 2018 Institutional Shareholder Services (ISS), the largest proxy advisory firm in the U.S., acquired EVA Dimensions, an EVA-based research firm founded by G. Bennett Stewart III, one of the co-founders of Stern Stewart & Co. Mr. Stewart currently serves as Senior Advisor to ISS. On March 18, 2019 ISS issued a report, entitled “Using EVA in Pay-for-Performance Analysis.” In that report ISS recommends the use of EVA as a tool to assess the alignment of pay and performance and indicates that during the 2019 proxy season it will be including in its proxy reports to investors a set of metrics based on EVA. (ISS distributes to its subscribers proxy reports providing its voting recommendations in connection with shareholder meetings of public corporations, including recommendations on shareholder votes regarding executive compensation.) In the report, ISS indicates that, at least during 2019, EVA-based metrics will not impact on its proxy voting recommendations and that it also is not taking a position as to whether it favors or disfavors the use of EVA as a metric in executive incentive plans.
Joseph E. Bachelder III is special counsel to McCarter & English, LLP. Howard Berkower, a partner with the firm, and Andy Tsang, a senior financial analyst with the firm, assisted in the preparation of this column.