EVA and Executive Compensation
This article discusses the EVA in the business who pay the application problems. First analyzed the salaries of business the present situation of the meaning and calculation EVA; second part deals with the operators of EVA-based remuneration, bonuses and EVA EVA design stock option plans, and the integrated score assessment indicators to determine the operator’s complete coefficient.
Experiences from practice, business owners pay the annual salary system and the main form of stock options, in addition to paid vacation, training, etc., but the results of the implementation is not ideal, mainly reflected in: First, there is no better pay and performance related sex; second performance measure is not comprehensive enough; third is to determine the annual salary is not enough science; Fourth, the effect of stock options is difficult to guarantee the implementation.
The content and calculation of EVA
(1) EVA meaning
EVA is economic value added, is the net operating profit after tax deductions business enterprises balance of all capital costs. It is calculated as follows: EVA = NOPAT-WACC × TC.
(2) EVA calculation
Calculation of EVA is as follows: 1.EVA adjustments. 2. To determine the total amount of capital. 3. The determination of net operating profit after tax. 4. To determine the weighted average cost of capital. Finally, according to the formula EVA = NOPAT-WACC × TC, current enterprise computing EVA.
EVA in the pay of the operators
Executive compensation consists of three parts: First, the basic salary, the general provisions in the employment contract as a fixed income; Second, risk compensation, due to take business risks and rewards; Third, the operator benefits and special allowances.
There are two possible risk compensation method. The first method: risk factor pay = basic pay × × Assessment Indicators coefficient; the second approach: risk compensation factor = ratio of residual profit × × Assessment Indicators coefficient.
(1) EVA in bonus pay of
Calculation of EVA-based bonus. EVA bonus = EVA assessment index × scale factor × Assessment Indicators coefficient.
EVA assessment indicators to determine
① only provide value added EVA bonus.
EVA bonus = K × A × (EVAt-EVAt-1)
② the implementation of EVA to provide value and increase the value of the prize.
EVA bonus = K × A1 × EVAt + K × A2 × (EVAt-EVAt-1)
③ on the over-provision of EVA and EVA bonus increments.
EVA bonus = K × A1 × (EVAt-EVA target) + K × A2 × (EVAt-EVAt-1)
(2) Evaluation Indicators Coefficient
Coefficient reflects the completion of assessment indicators other than the target profit targets completion. Completion of this assessment index coefficient is based on individual performance on the operator based on a comprehensive assessment, drawing on the account step by step comprehensive scoring method, first of all … …
Thus, assessment indicators to determine the completion factor took into account the operator contribution to the enterprise, effectively inhibited the short-term behavior. … …
(3) A determination of scaling factor
Receive bonuses based on EVA – bonus bank.
EVA-based stock options
1. Stock options.
(1) EVA stock option exercise price of the design of dynamic
Change the exercise price by the way, in the time of the grant equal to the stock’s market price or fair value, operating performance after the grant of the changes according to the company adjust the rate of price determination into account the various factors.
Adjusted rate = … …
(2) EVA design of the number of stock options granted
Incentive stock options generally EVA EVA bonus bank together with the implementation, in accordance with the amount of deposit money banks money call options, according to the option exercise price P0, is calculated as:
= Number of options granted to … …
2. Based on EVA virtual stock options.