Economic Value Added

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enterprise still returns less to the economy than it devours in resources….Until then it does not create wealth but destroys it" (Ehrbar 2). EVA is a measure of wealth creation or destruction after all costs are capitalized.
Companies use EVA as a measure of corporate performance, as an incentive system and as a link between shareholder and management/employee goals. Stock price indicates investor's certainty concerning current and future earnings potential. EVA is a static measure of corporate performance; MVA is a dynamic, forward looking market performance measure. "MVA is a market generated number calculated by subtracting the Capital invested in a firm © from the sum (V) of the total market value of the firm's equity and book value of debt: MVA=Vt-Ct" (Kramer & Pushner 42). Al Ehrbar describes MVA as exactly equivalent to the stock market's estimate of the NPV of a company. In 1998 CSX Corperation introduced EVA criteria to the fast growing but low margin CSX ...

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operating risk because some of the bonus is put in a "bank," say, for five years. If over the next five years management performs poorly, and EVA drops, the "bank" account is depleted. Management incurs the risks and benefits just as owners do.
Joel Stern notes that in cases without an EVA incentive plan, employees suffer from a common problem. On average their fixed pay, salaries and pension, are too high, and their variable pay, profit sharing and share options, are to low (Ehbar XIX). Stern adds that size, not value, drives employees in typical incentive programs because size is positively correlated with increases in fixed pay and closely thereafter, variable pay, even if it ...

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