Economic Value Added: What You Need to Know in Anticipation of Greater Emphasis from ISS
As shareholders and proxy advisors voice heightened concerns with relative total shareholder return, some are predicting a sea change in how pay-for-performance is evaluated. One approach gaining steam is a hybrid of sorts: economic value added (EVA).
EVA has recently garnered a lot of attention due to Institutional Shareholder Services (ISS) and their acquisition of EVA Dimensions, a firm that specializes in EVA calculations. ISS incorporated EVA functionality into their online CEO Pay for Performance tool in February 2019 and has published a few white papers on the topic. While there’s currently no confirmation that ISS will use EVA in their future financial performance assessments, that’s what many observers expect.
In this issue brief, we first discuss how to measure EVA and what types of adjustments might be necessary in order to yield sensible results. Then we walk through advantages and disadvantages of using EVA as a performance metric. Finally, we compare EVA with TSR to give you an idea of whether EVA could be worth considering for your company.