Journal of Indian Business Research

Social construction of linking executive compensation to EVA: a study on Indian

corporates
Manju Tripathi, Smita Kashiramka, P.K. Jain,
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Linking
Social construction of linking executive
executive compensation to EVA: a compensation

study on Indian corporates

Manju Tripathi, Smita Kashiramka and P.K. Jain
Indian Institute of Technology Delhi, New Delhi, India
Received 4 October 2017
Revised 4 October 2017
Accepted 21 July 2018
Abstract
Purpose – “Paying for performance” has been the corporate mantra for ages, but finding the right
performance benchmarks continues to be an enigma. Equally significant is the ongoing debate on the
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superiority of economic value added (EVA) aligned executive incentive plans over traditional financial
performance benchmarks to ensure optimal goal congruence between the corporate and the executive
performances. Consequently, this paper aims to explore a plausible linkage between executive compensation
and EVA for Indian corporates from a social constructivist perspective.
Design/methodology/approach – The study uses a mixed method approach where the quantitative
analysis of responses from the survey of senior personnel/finance executives of Indian firms is complemented
by the qualitative analysis of personal interviews to provide contextual depth to the quantitative data.
Findings – Based on the study, the researchers construct an understanding that EVA is a superior concept
but has restricted utility primarily owing to its computational complexity and unaudited characteristics. The
researchers’ interpretive inference finds mandatory disclosure of an audited EVA figure in the corporate
financial statements as a prime requirement for EVA to emerge as an objective and visible performance
measure.
Practical implications – Attention of policymakers is sought towards standardising its computation and
ensuring its disclosure to bring it at par with the conventional executive financial performance benchmarks.
Originality/value – The narrative on benefits and the challenges of adopting EVA aligned performance
management system is provided directly by the top-level executives responsible for designing the “paying for
performance” policies.
Keywords India, Executive compensation, Economic value added, Performance management,
Financial performance benchmarks
Paper type Research paper

Introduction
Mission, vision and strategies of any profit making organisation hinges around value
creation for its shareholders. So, what are the yardsticks that measure wealth creation or
performance? The performance of an organisation is contingent to performance of its
executives. Usually, the management, responsible for planning and running the operations
of a firm, is not the owner of that firm. Essentially, the shareholders (owners) and the
management share a principal–agent relationship, wherein the principal engages an agent
to perform certain tasks on the principal’s behalf, for a remuneration. Therefore, when the
shareholders’ focus is on long-term value creation their executives look for quick rewards,
creating a dichotomy in performance measurement (Figure 1). In turn, these give rise to
conflicts of interest, called agency issues, as managers and shareholders have partly
Journal of Indian Business
Research
Authors are grateful to Prof. Chandranshu Sinha, Amity Business School, for his key inputs on © Emerald Publishing Limited
1755-4195
research methodology and feedback on the paper. DOI 10.1108/JIBR-10-2017-0173
 JIBR different goals and risk preferences. Executive compensation is one such typical issue most
debated in the corporate world. Consequently, a performance benchmark that best links
executive performance, enterprise value and strategic thinking is necessitated.
The case of economic value added (EVA) as an optimal financial performance indicator
has been gaining ground (Stewart, 1991; Stern et al., 1996; Banerjee, 1999, 2000; Prober, 2000;
Ray, 2007 and Vishwanath, 2010), over conventional earnings measures like sales revenue,
earnings after tax (EAT), net operating profit after tax (NOPAT), return on capital employed
(ROCE), earnings per share (EPS). Stern Stewart and Co., proponents of the concept and
owners of trademark EVA®, contend that an EVA aligned executive incentive plan ensures
optimal goal congruence between the corporate and the executive performances. They
contend that the conventional financial measures do not account for the cost of shareholders’
funds and hence may create a situation of pseudo profitability while actually destroying the
shareholders’ wealth by not earning enough to cover the cost of their investments.
Oliver Hart of Harvard University and Bengt Holmstrom of the Massachusetts Institute
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of Technology, share the Nobel Prize, 2016 for Economic Sciences for their revolutionary
contributions towards contract theory on “paying for performance”. The contract theory
delves into drawing optimal contracts ex ante, between owners and managers, with the
ability to measure and verify performance ex post. Considering the importance being
assigned to structuring pay, the present research, in its small way, explores a plausible
linkage between executive compensation and EVA as a financial performance benchmark,
among Indian corporates. Emphasising on the socio-technical characteristics of
management accounting practices (McLaren et al., 2016) the paper socially constructs the
acceptability, benefits and challenges of linking EVA to executive compensation through
mixed method research. The researchers’ interpretive inference is derived from the analysis
of one-on-one personal interviews concurrently conducted along with the survey of senior
corporate executives. The significance of the study assumes greater dimension since only 37
out of 500 (7.4 per cent) Indian firms studied by Kaur and Narang (2010) report EVA despite
the fact that it is a direct and absolute measure of shareholders’ value. In addition, we
highlight how the prevalent “performance related pay” system in the public sector
undertakings (PSUs) is wanting in offering key performance drivers. Moreover, we have not
found any extant primary research of this dimension, undertaken to explore the linkage
between executive compensation and EVA, in Indian context. The outcome would help
draw a roadmap towards improved performance management system, for Indian
corporates.

Literature review
“Making Managers into Owners”, is the right way to ensure the creation of shareholders’ or
owners’ wealth contends Stewart (1991). This can be achieved, to a marked extent, by
introducing EVA-based incentive plans. He asserts that the traditional system of target

Performance Measurement

Figure 1. Corporate Performance Executive Performance

Goal Congruence
Dichotomy of Goal: Shareholder’s Value Measures? Goal: Personal Rewards
performance Creation Primarily Short-Term
measurement Primarily Long-Term
 based bonus plans focusses on managing earnings instead of maximising value. A share of Linking
growth in EVA with no cap on incentive provides built-in mechanism to motivate managers executive
to direct efforts towards long-term gains. Pettit and Ahmad (2000) go on to explain how
traditional performance measurement and incentive schemes have failed to keep pace with
compensation
the new economy age. Traditional compensation strategies are more concerned about
finding the optimal level of pay, rather than finding measures to drive the pay. It is usually
the company’s size that drives the pay. Their survey findings reveal a poor correlation
between company’s performance and CEO’s pay. Their study finds no visible pay at risk,
even though 70 to 80 per cent of the total pay is variable. This finding is corroborated during
the recession in 2009 when top executives pocketed huge bonuses while their firms faced
financial failures (Houston Chronicle, 2009). Company’s size, being the primary driver of
CEO’s pay, is also observed by another research on US companies (Sigler, 2011). Besides
size, the tenure of CEO is also understood to have a significant correlation to their pay. Tosi
et al. (2000) conduct a meta-analysis of earlier literature on the linkage of the firm’s size and
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performance with CEO pay. They also observe that the firm’s size accounts for 40 per cent of
the variance in total CEO pay, while the firm’s performance accounts for only 5 per cent of
the variance.
Jensen and Murphy (1990) state that it is not important how much a CEO gets paid but
how? They contend that corporate America paid its CEOs like bureaucrats with hardly any
incentive to act like entrepreneurs. Their study supports the findings that salaries of top
executives of public companies are rarely impacted by the company’s performance. If there
is no real threat of dismissal on poor performance, the rewards are equally not
commensurate with the value created. They recommend that CEOs should hold substantial
equity and not just equity options, to align their interests with shareholder’s interests.
Effectively, they make a case of converting managers into owners. In a related study,
Akindayomi and Warsame (2012) observe a positive impact of stock options on the firm’s
value. However, the relationship is more pronounced when linked to reported earnings
rather than non-discretionary earnings (operating earnings adjusted for earnings
management options). The results show that stock options may induce top executives to
manage earnings, not favourable to shareholders. Similar study in UK observes that only
cash component of CEO’s salary has positive and significant relationship with company’s
performance, not the total compensation (Ozkan, 2011).
It has also been noted that institutional ownership has significant influence on level of
CEO compensation. Mehran (1995) investigates the influence of the firm’s ownership
structure on executive compensation. He observes that the firms, with more number of
outside directors on board, offer a larger proportion of equity based compensation. The
reverse is the case if outsiders hold a large block of equity shares, although the finding
supports that the firm’s performance is positively linked to equity-based executive
compensation. His results align with observations of Jensen and Murphy (1990) in that it is
the form (equity options and other perquisites), and not the level of compensation that
motivates executives to create value. Bannister et al. (2010) examine performance
benchmarking in contracts of executives of S&P 500 firms, between 1993 and 2003. They
observe that use of stock returns in structuring compensation increased by 36 per cent,
whereas linkage to accounting earnings declined by 38 per cent, during that period.
Lovata and Costigan (2002) study the characteristics of the firms using EVA as
performance measure against those which do not. They note that EVA adopters are usually
the firms with large institutional ownership and less managerial ownership, and EVA is
probably adopted to address agency conflict. In addition, they observe that defending firms
with low research and development to sales ratio tend to adopt EVA-based performance
 JIBR measure. Prospective firms with substantial research and development expenditure, largely
base their incentive plans on non-financial performance measures like new product
development, customer satisfaction, time to market, etc. In a similar study, Fatemi et al.
(2003) examine the dependence of managerial pay on the firm’s performance for EVA using
firms. Their results observe the size and level of global operation of the company as the
primary driver for managerial pay. Size adjusted or standardized compensation bears a
significant positive relationship with standardized market value added (MVA) and ROA,
but not with standardized return on equity (ROE) and EVA.
EVA-based compensation model has been studied as cases in Indian context. Ray (2007)
describes how an EVA-based compensation system is implemented at Tata Consultancy
Services (TCS) in India. The compensation has three parts – first a share of EVA at the
corporate level, second a percentage of EVA of the business unit of the employee and third
the employees own performance. EVA drivers of the firm and business unit in terms of
revenue, costs and capital charge, are clearly defined with respect to the employee’s
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functions. Employees are enlightened about these drivers and are expected to work towards
value enhancement. Another study on TCS outlines various training and development
initiatives undertaken by TCS in successfully implementing its EVA aligned talented
management (Kang and Sidhu, 2011).
Another Indian study, Vishwanath (2010) describes the process of implementation of
EVA based performance system at Godrej Consumer Products Limited (GCPL). He has
explained the creation of EVA centers, identification of drivers for improvement of EVA and
EVA aligned incentive plan for managers at GPCL. Similar study for GPCL was undertaken
by Mittal et al. (2008). The study delves on the reasons for adopting EVA aligned
performance management system, implementation issues and benefits derived in terms of
SWOT analysis. It observes a positive link between EVA aligned performance management
and company’s performance. The study raises a few open-ended questions for further
discussions, like what will happen to compensation in an exceptionally bad year.
Kaur and Narang (2010) explore EVA reporting practices prevalent among Indian
corporates. They examine the annual reports of top 500 Indian companies to find that only
37 companies (7.4 per cent) disclose EVA as a performance metric. Their study also attempts
to identify whether EVA reporting companies are significantly different from EVA non-
reporting companies on the basis of their background (age and residential status) and
financial performance indicators (size, profitability, leverage, sales efficiency and earnings
potential). Findings indicate that the EVA usage and disclosure choice in Indian companies
are influenced by company’s size, profitability, leverage, sales efficiency and residential
status. The age and earnings’ potential of a company do not have a significant impact on
EVA disclosures choice of a company. Also, none of the companies computed EVA based on
all the adjustments suggested by Stern Stewart and Co. This research corroborates findings
from their earlier case study on Satyam Computer Services Limited, (Kaur and Narang,
2008). It compares EVA disclosed and EVA computed as proposed by Stern Stewart and Co.
The divergence between the two shows that the methodology of EVA calculation is
dependent on organisation’s approach towards it. Berber et al. (2012) outline the ways in
which EVA-based incentive schemes can be implemented. The process, as proposed by
Stern Stewart and Co., requires the creation of “bonus bank” where bonus earned each year
is stored for multi period payout. Current year bonus linked to actual as well as growth in
EVA takes care of short and long-term requirement of incentive plans. Prober (2000) also
backs EVA as a better performance benchmark but warns that its success depends on the
ability of employees to understand and accept the system.
 On the other hand, McLaren et al. (2016) highlight the importance of socio-technical Linking
nature of institutionalisation of management accounting practices by studying the adoption, executive
adaption and demise of EVA aligned performance management system by three firms of compensation
New Zealand. Similarly, an Indian study based on primary research (Pal and Kumar, 2011)
seeks information directly from Indian corporate managers of pharmaceutical and IT
industry on their opinion about efficacy of EVA as a performance measure. Majority
respondents perceive EVA to be a useful tool and acknowledge the benefits, but assign
implementation challenges as reasons for not using it.
In his paper on China, Stern (2011) expects a radical shift in strategies and performances
of government-owned Chinese Companies after introduction of three-year “Performance
Based Policy” by Central State-owned Asset Supervision and Administration Commission
of State Council of People’s Republic of China. The policy change brought in early 2010
assigns 40 per cent weight to simplified version of EVA in assessment of performances of
senior executives. Author strongly contends that these companies in three years are most
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likely to be transformed in structure and culture to focus on generating values, if the policy
is implemented in true spirit.
Literature assigns varied rationales for adopting or not adopting EVA as a performance
benchmark. Therefore, the present survey aims to elicit direct responses from Indian firms
on the benefits and issues of adopting EVA aligned performance management system.

Research methodology
A successful institutionalisation of changes in management accounting practices, like
adoption of EVA aligned performance management system, requires integration of the
technical accounting changes with the perception and conviction of its participants
(management and employees). Therefore, to bring in the human perspective, a social
constructionism method is used to understand the plausible linkage between executive
compensation and EVA as a performance benchmark. This approach is used by many
contemporary researches; a select list includes financial/banking crisis of 2007 (Breitstein
and Dini, 2012; Kristensen, 2015), behaviour of financial market (Zajac and Westphal, 2004),
implementation and eventual abandonment of EVA-based performance management
system (McLaren et al., 2016).
Besides, the study uses the convergent parallel design of mixed method research. The
outcomes from a quantitative analysis of survey data collected through questionnaire from
senior HR/Finance executives is complemented with the content analysis from the one-on-
one personal interviews of top HR executives of select Indian firms; the personal interview
offer a deeper contextual insight into the benefits and issues related to EVA aligned
performance management system.
The questionnaire (Annexure 1) is designed to elicit responses on whether firms compute
EVA. If the firms are computing it, whether it is being used as a performance benchmark
and what are the benefits and challenges associated with it? If not, what are the probable
reasons for not computing or adopting EVA as a performance benchmark? The professional
networking site “linkedin”, is used to connect with senior HR/Finance executives, with a
request to respond to the questionnaire. Primarily, NIFTY500 companies are targeted, but
we have also included responses from private limited firms.
The interviews are conducted in a semi-structured format, using questionnaire as the
base. The choice of the firms for personal interviews is mainly based on the willingness and
availability of the senior executives.
 JIBR Empirical results and discussion
The results are discussed in two sub-sections covering outcomes from questionnaire and
personal interviews.

Outcome from the questionnaire

A total of 109 responses has been received, of which 23 respondents have opted for not
disclosing their identity. All 109 responses have been considered for analysis, since the
responses are important, even when the individuals do not wish to identify themselves. The
profiles of 86 respondents that have been identified as a part of the survey are included as
Annexure 2. The number of responses varies question-wise as respondents could choose not
to reply. Such cases have been categorised as “No Reply” under that question. Outcome and
discussion for each of the questions (refer questionnaire) is as follows.

Proportion of the variable component of the pay at executive/decision-making level

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Responses for the proportion of variable pay are sought under four broad functional
categories – CEO/MD, sales, operations and support functions (finance/HR/IT/R&D etc.).
The results are charted in Figure 2. The results show that majority respondents (42 per cent)
attribute a range of 20-40 per cent as variable pay component for CEO/MD. It is followed by
22-23 per cent respondents assigning the ranges of 0-20 and 40-70 per cent to variable pay,
with only 7 per cent stating it to be more than 70 per cent. Therefore, statistically, we can
safely assume that majority organisations offer their CEO/MD a variable component in the
range of 20-40 per cent. In line with CEO/MD, majority of sales executives (40 per cent
respondents) are also drawing a variable package in the range 20-40 per cent, however, a
similar number of responses (35 per cent) define the range as 0-20 per cent. A review of
sectors across responses reflects that the ranges ascribed are company specific and cannot
be attributed to specific sectors. However, the minimum variable pay range for sales in IT

C E O / MD S a l es
42%

40%
% of Responses

% of Responses

35%
23%

22%

17%
7%

6%

4%

4%

0 – 20 – 40 – > 70% NO 0 – 20 – 40 – > 70% NO

20% 40% 70% REPLY 20% 40% 70% REPLY
Range of Variable Pay Range of Variable Pay

Op eration s S u p p o rt Fu n ctio n s
63%

63%
% of Responses

% of Responses
22%

28%
9%

6%

6%
3%
0%

0%

Figure 2.
Proportion of variable
pay under each 0 – 20 – 40 – > 70% NO 0 – 20 – 40 – > 70% NO
20% 40% 70% REPLY 20% 40% 70% REPLY
functional category
Range of Variable Pay Range of Vaiable Pay
 sector is observed to be 20-40 per cent, whereas energy, health and chemicals sector Linking
dominate the 0-20 per cent range. The operations and support functions executives executive
primarily receive a variable package in the range 0-20 per cent with around 63 per cent compensation
responses assigning this value. Equally significant observation is that not a single response
ascribes a range of greater than 70 per cent for operations and support functions.
The findings largely align itself with the concepts of business centres; the variable pay
incentives for a revenue or profit centre (sales/CEO/MD) is expected to be higher than that of
cost centres (operations and support functions). Next, it would be important to figure out the
impact of the company’s performance on variable pay. Survey findings of Pettit and Ahmad
(2000) reflect no visible pay at risk, for US firms, even when the variable component of the
pay is as high as 70 per cent. Consequently, the present study in Indian context, further
extracts responses on prevalent financial benchmarks, to assess the utility of EVA vis-à-vis
other financial performance metrics in vogue.
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Prevalent financial performance benchmarks linked to variable pay/economic value added as

a performance benchmark
The outcome (Figure 3) reflects that sales revenue, EBITDA and EAT are predominantly
used as financial performance measures. Moreover, sales revenue is found to be most
prevalent financial benchmark with 82 out of 109 respondents (75 per cent) describing it as
one of the performance metrics (Figure 3). EAT and earnings before interest depreciation
and taxes (EBIDTA) follow sales revenue at 49 and 39 per cent, respectively. We wish to
highlight that only 23 per cent of the responding firms use ROCE as a performance
benchmark, despite the fact that it is an all-inclusive profitability measure. ROE, EPS and
MVA are only selectively used, but are not so widespreadwith only 10-14 per cent
respondents naming them as one of the performance metric. It is encouraging to note that 18
per cent of the firms responded use of EVA as a performance benchmark (Figure 3).
The results demonstrate that the traditional financial performance metrics are preferred
benchmarks to evaluate executive performance. Moreover, the findings indicate that the
absolute financial measures like sales revenue, EAT and EBIDTA, dominate the space over
ratio measures (ROCE, ROE and EPS). Nevertheless, even though EVA is a direct and
absolute measure of shareholders’ value creation, acknowledged by many firms (part of the
interviews section), it is seldom adopted as a financial performance metric. Consequently,
the survey next endeavours to evaluate the probable reasons for not adopting EVA as a
75%

49%
% of Responses

39%

23%

18%
14%
13%

10%

Figure 3.
Prevalent financial
performance
Revenue EBIDTA EAT ROCE ROE EPS MVA EVA
benchmarks
Financial Performance Metrics
 JIBR performance metric. It simultaneously attempts to discover the benefits and challenges of
EVA aligned performance benchmarking, from EVA adopters.

Plausible reasons for not using economic value added as a performance benchmark
The summary of responses (Table I) from 89 EVA non-user companies (20 firms are EVA
users) is depicted via Figure 4 (reasons are designated as A, B, C and D).
Almost half the respondents (47 per cent) believe that it is difficult to establish a direct
link between EVA and compensation; therefore, it is not used as a performance benchmark.
This is further supported by 35 per cent of respondents attributing complexity in the
implementation of EVA aligned performance management system for not using it. An
equally large number of respondents (35 per cent) cite EVA not being an audited/reported
number, as one of the reasons for its non-adoption. Moreover, 9 per cent of the respondents
have separately mentioned the difficulty in determining the opportunity cost of capital as an
added reason for not using EVA. The promising outcome is that in spite of all the concerns
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expressed, only approximately one-fifth (19 per cent) of the respondents state that the
concept is not very clear.
Having elicited the rationales for non-use of EVA, the survey continues to explore the
benefits and challenges from EVA adopters.

Understanding of the concept/motivating factor/implementation challenges/impact on

variable pay if economic value added is negative
Questions 6 to 9 (refer questionnaire) are designed to elicit responses from EVA adopters on
whether employees’ understand the concept; EVA acts as a motivating factor to perform; the
organisation faces any issues in implementing EVA-aligned executive performance
management; there is any impact on variable pay if the firm registers a negative EVA. The
responses from the 20 EVA adopting firms are delineated in Table II.

Responses A B C D C and D Total

A& 10 4 3 2 19
B& 14 4 6 7 31
C& 8 6 14
D& 18 18
No Reply 7
EVA non-users 89
EVA users 20
Total number of responses 109
Total under each category (includes overlapping numbers)
A B C D
A& 10 4 3
B& 14 4 6
C& 4 4 8 6
D& 3 6 6 18
A&C 2
A&D 2
B&C 7
Table I. B&D 7
Combination of C&D 2 7
reasons for not using Total 19 31 31 42
EVA Total as percentage of EVA non-users 21 35 35 47
 Majority of the EVA adopters (75 per cent), feel that the employees understand the Linking
concept and it motivates them to deliver value (95 per cent). More than half of the executive
respondents (60 per cent) do not find the concept difficult to implement. Another important compensation
outcome is that in majority cases (65 per cent), the variable pay either declines or is not paid,
if EVA is negative. This is contrary to the findings of many studies (Jensen and Murphy,
1990; Pettit and Ahmad, 2000; Houston Chronicle, 2009; Sigler, 2011), which observe very
little pay at risk even when the variable pay component is as large as 70 per cent.
There are eight responses (out of 20 EVA users), which define the implementation issues.
Complexity in the determination of the cost of capital and EVA, coupled with resistance to
change are articulated as prominent issues. Other problems mentioned are – non-finance
executives find it difficult to understand and perceive it to be a factor beyond their control.
Besides, it is an arduous task to allocate the EVA, computed at the corporate level, to its divisions.
In sum, the survey manages to gauge perception of Indian corporates in pursuing EVA
aligned performance management system.
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Outcome of the interviews

In all, nine top level HR executives have been interviewed to get a deeper understanding,
and to substantiate the survey outcome on the linkage between executive compensation and
corporate/executive performance. Major findings of the interviews are outlined below.

C:35%

A: B:
21% 35%

D:47%

Notes: A: Concept is not very

clear; B: Concept is sound but
implementation is a challenge;
C: EVA is not an audited/
reported number; D: Difficult Figure 4.
to establish direct link between Reasons for not using
EVA
EVA and compensation

Questions Responses
Yes No Table II.
Employees understand EVA 75% 25% Benefits and
Motivates to achieve 95% 5% challenges of EVA
Difficult to implement 40% 60% aligned performance
Impact on variable pay if EVA is negative Decreases/Not paid (65%) No impact (35%) management
 JIBR Pay structure – structuring pay for performance not only is complex but also involves
continuous innovation. Moreover, structuring and performance benchmarking is highly
industry specific. The Head-HR of a leading pharmaceutical firm unequivocally puts it as,
“the regulations in pharmaceutical industry make it very different from other industries,
therefore, the individual performance measurement is so much more challenging”.
The executive performance appraisal primarily relates to variable component of the
compensation package. There are predefined tangible and intangible goals, where a large
part of variable pay is linked to quantifiable targets, rather than qualitative objectives. In
addition, due care is taken in selection of performance metrics that are visible to, and
controllable by the concerned executive. Above all, the main objective of goal setting and
performance management is to ensure that the short-term leadership behaviour does not
adversely impact the long-term prospects of the firm.
Proportion of variable pay – the proportion of variable pay depends on the function and
the level of the executive, in the organisational hierarchy. According to the Chief People’s
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Officer of a reputed IT firm, “[. . .]the component of variable pay increases as your ability to
impact the company’s performance increases[. . .]”. The approach is corroborated by Sr. Vice
President – HR of another leading IT company, opining that, “[. . .]the principle we adopt is
higher the pay band – higher the variability[. . .]”.
However, the exception to the hierarchy is made in the case of sales, where the variable
component of the pay is sometimes higher than that of the CEO, irrespective of the level of
sales executive (junior, middle or senior). No wonder we find sales revenue as the most cited
financial performance benchmark, under the questionnaire survey.
Summary of the prevailing average proportion of variable pay under the four major
heads are detailed in Table III.
Performance-related pay at PSUs – the variable pay at a PSU is largely driven by the
organisational performance. Very little distinction is made between individual
performances, at any functional level. For example, if the organisational performance is
rated as excellent, the executives in the grade E6 will receive 60 per cent as the variable pay,
whether they are in sales, operations or finance. Moreover, the variable pay witnesses small
variability at any level on account of individual performance ratings. The rationale offered is
that the performance of the company is driven by the government policies, with a focus on
socio-economic welfare. Evidently, the process dilutes the significance of a suitable
executive performance benchmark; a strong case for a review of existing performance
policies.
Financial performance benchmarks in vogue – the outcome aligns itself with the
questionnaire responses defining sales revenue, EAT, EBIDTA, earnings before interest
and taxes (EBIT) and earnings before tax (EBT), as conventional financial performance
metrics. Notwithstanding, the weights attached to each of the performance metric would
depend on the nature of the executive function. The performances of CEO/MDs are largely
judged using EBIDTA, EBT or EAT, as they are entrusted with driving the firm’s overall

Function Nature of function Total salary in relative terms Proportion of variable pay

CEO/MD Overall performance of the firm Highest Min 30%

Sales High on revenue/margin High Min 40%
Table III. Operations Routine Moderate 30-40%
Proportion of Support Routine Low Max 30%
variable pay functions
 performance. Revenue metric is mainly linked to performance of sales executives, who are Linking
also sometimes held responsible for sales volume and/or market share. As the products of executive
consumer staples and pharmaceutical industries have limited shelf life, goods returned and
sales realisation feature as key performance measures.
compensation
Some of the firms offer long-term incentives, over and above the annual variable pay, in
the form of “employee stock options”, linked to performance measures like growth in market
share, market value added or EPS. This, the respondents believe, effectively captures the
essence of EVA as a performance measure. Likewise, the business level target setting,
signed off by the company’s board, specifies minimum expected ROCE. In the words of the
Head – HR of the IT company, “[. . .]the way I look at it – I think it gets inbuilt into the target
setting process[. . .]”. Benchmarking the minimum expected ROCE to industry average is an
indirect way of recognising value addition or EVA. Apart from this, if the firm is listed on
New York Stock Exchange, the EVA is necessarily computed at board level, but is rarely
shared down the line or used as a performance benchmark.
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EVA as a performance benchmark – only one out of the nine companies interviewed, use
EVA as a performance benchmark. The company launched EVA aligned performance
management system in the year 2000, and they faced their first biggest challenge in the year
2003. To quote their Head – Talent Acquisition, “In 2003, we had a negative EVA. That was
the first time when salaries were reduced – the variable component of the pay was made
zero – for everyone across the board[. . .] It was pretty chaotic at that time and we expected
the attrition rate to go up[. . .]”. The system has since evolved to restrict the impact of EVA
on variable pay. Educating and training the employees, particularly the non-finance
executives, has been the core implementation issue aside from computational complexity.
Moreover, EVA gets computed at organisational level; allocating it to business level, which
in turn percolates down to individuals, is an arduous exercise. How the EVA is calculated
continues to be an enigma for some. Yet, the firm values it as an important indicator of
shareholders’ value creation; and hence, diligently uses it as a financial performance
benchmark.
Executives across the board, agree that EVA is a sound concept but would refrain to
internalise it unless it becomes an audited/reported number. The reason is that an audited
number cannot be disputed by the appraisee. The complexity in computation of cost of
capital and the capital outlay, further acts as a deterrent. The unanimous view is that any
financial performance metric should be unambiguous and controllable. The responses to the
question on potential use of EVA in future is aptly summed in the response of Sr. Vice
President – HR, of a leading IT firm, “[. . .]I guess if executives see a logic between their role/
action and its linkage with EVA, in context of our industry, then I think they will definitely
buy it – why not!! [. . .] I don’t see any problem in people embracing it[. . .]”.

Concluding observations
There is no denying the fact that EVA, value derived after providing for complete charge on
total capital employed, is a direct and credible measure of shareholders’ value creation.
However, traditional financial benchmarks continue to dominate the performance
measurement space. The interpretive inference of the study identifies complexity in the
computation of EVA, coupled with the number not being audited/reported, as the primary
hurdles in adopting EVA as a financial performance benchmark. Thus, the need of the hour
is to standardise computation of EVA and assign its due space in corporate financial
statements. We hope to draw attention of policy makers like Institute of Chartered
Accountant of India (responsible for introducing requisite accounting changes from time to
time in the interest of internal as well as external stakeholders) and Ministry of Corporate
 JIBR Affairs to take cognizance of significance of EVA and initiate steps for its mandatory
disclosure in the financial statements. The step is even more important form the point of
view of PSUs where the current performance management system leaves a lot to be desired;
scant variation at grade level pay to recognise individual performances deprives executives
of the crucial performance driver – the incremental monetary incentive for a superior
performance.
In sum, the narrative corroborates our view that EVA is the most appropriate
performance benchmark to address the agency issue and ensure goal congruence (Figure 1).
Moreover, we believe that the moment the concept of EVA is formalised, it will
automatically start gaining acceptance as a performance benchmark, which best links
executive performance and enterprise value. Furthermore, once EVA emerges as an audited
figure, the other minor issues related to the understanding of EVA or allocating it to
business divisions would automatically be taken care of.
China introduced EVA-aligned performance measurement as policy measure, in the
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year 2010, for its government-owned companies Stern (2011). In India, we hope to draw
attention of policy makers in standardising the computation of EVA, and bringing it at
par with other financial performance benchmarks. As the survey could elicit only a
limited number of responses (109 out of 528 requests), accordingly the outcome has to be
assessed in that background. Significant learnings could be drawn by furthering this
study to government-owned Chinese companies post the implementation of performance-
based policy measure.

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JIBR
Appendix 1. The questionnaire
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compensation
executive
Linking
 JIBR Appendix 2. Profiles of the respondents

Sr. no. Name of the company Designation

1 Axis Capital Limited Executive Director

2 Adani Enterprises Limited Manager – HR
3 Adani group Sr. Manager finance
4 Adani Group Manager – Finance
5 Alembic Pharmaceuticals DGM-HR
6 Asian Paints Limited Senior Manager – HR
7 Atos RSH
8 Atul Limited General Manager
9 AVI-OIL INDIA [P] LTD AGM-HR and IR
10 BCCL AVP
11 Bharat Forge CFO
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12 BHEL DM–HR
13 Birlasoft Head – HR
14 Britannia Industries Head – HR
15 Bureau of Energy Efficiency Manager
16 Capsule gel Director – HR
17 Century Enka Limited Officer
18 Cipla Finance Manager
19 Cognizant Manager Consulting
20 Coromandel International Ltd HR Manager
21 CRISIL Manager Business Analysis
22 CS Analyst
23 Deloitte Consultant
24 Den Networks Ltd GM Finance
25 DESL Sr. Analyst
26 Dhanuka Agritech DGM HR
27 Dr Reddys Laboratories Ltd Sr. Director and Head HR
28 E4e GM–HR
29 Elder Pharmaceuticals Ltd President – HR and Admin
30 Entertainment Network (India) Ltd MD and CEO
31 GAIL Manager (HRD)
32 Ghana Mines Limited CFO
33 Godrej and Boyce Mfg. co. ltd. Associate General Manager
34 HCC Chief Pers. Admin and CSR
Manager
35 HMT Machine Tools Ltd Manager HR
36 Homestead Development Corporation General Manager
37 IBM Advisory consultant
38 IDFC Bank Head Business Planning
39 Indian Air Force Joint Director
40 Indian Oil Corporation Finance Manager
41 Indusind Bank limited Branch Head
42 Integra Software Service Pvt Ltd Associate Vice President
43 Ireo Head HR
44 ITC Limited HR Manager
45 Jet Airways Ltd. Vice President – Finance
46 JSPL Head – HR and ES
47 Kajaria Ceramics Ltd. Jr. HR Executive
48 Kansai Nerolac Paints Limited Manager–HR
Table AI. (continued)
Questionnaire
 Linking
Sr. no. Name of the company Designation executive
49 Larsen and Toubro Head – HR
compensation
50 Lea Associates South Asia Pvt Ltd Engineer –PHE
51 Mahindra Comviva Sr. VP
52 Maruti Suzuki India Ltd. DGM – HR
53 Meghmani Organics ltd Head Sourcing
54 Motilal Oswal Financial Services Assistant Manager–HR
55 Myicourse.com CTO
56 NTPC Ltd. Manager
57 Oracle Regional Manager
58 Orchid Pharma General Manager – Finance
59 Page Industries 5 General Manager Finance
60 Persistent Systems Limited Manager – Human Resources
61 Principal asset management Regional head
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62 Punjab National Bank Manager (Industry)

63 Radico Khaitan Ltd
64 Rallis India Ltd. Vice President, HR and
Business Excellence
65 Reliance Infrastructure Ltd. AVP – Investor Relations
66 Reliance Power Vice President
67 Resinova Chemie Ltd Vice President
68 Samsung Lead engineer
69 Shree Cement Ltd. Senior Manager
70 Siemens Sr. Manager Finance
71 Sodexo MD and CEO
72 SRF LTD Sr. VP and CFO – Textiles
Business
73 STmicroelectronics Sr. Staff engineer
74 Sundaram Finance Limited Head HR
75 Tagit Pte Ltd Head – HR
76 Tata AIA senior manager
77 Tata Power CHRO
78 Thermax Sr. Manager–Finance
79 Titan CFO
80 Torrent Power GM HR
81 Trent Hypermarket P Ltd Head Finance and Accounts
82 Triton Communications P. Ltd. Executive Director
83 Vedanta Limited Head Unit Finance
84 Videocon Industries Ltd Branch Manager
85 Yes Bank Vice president
86 Zeppelin Systems India Managing Director

Note: *23 responses do not provide corporate identity Table AI.

About the authors

Miss Manju Tripathi is a research scholar in Finance with DMS, IIT Delhi. She has over 19 years of
industrial experience across corporate treasury, finance and banking. The organisations and her level
of associations are Sr. Vice President – HSBC; Dy. General Manager Treasury – Jet Airways;
Manager Corporate Finance – Tata Motors and Indian Petrochemicals (now part of Reliance
Industries). Moreover, she was a faculty at Galgotias Business School, Greater Noida, teaching
Banking, International Finance and Costing. Manju Tripathi is the corresponding author and can be
contacted at: trimanju@gmail.com
 JIBR Dr. Smita Kashiramka is an Assistant Professor in the area of Finance at DMS, IIT Delhi. She
holds a PhD from BITS, Pilani, in the area of Mergers and Acquisitions. She has more than nine years
of academic experience along with a brief corporate experience in the insurance industry. Her areas of
interest include accounting, indian financial system, corporate restructuring and financial
management. She has published papers in international and national journals of repute.
Prof. P.K. Jain is a Professor Emeritus in Finance at DMS, IIT Delhi. He earlier served as the Head
of DMS and is a Co-ordinator of Dalmia Research Programme on Management in Asia. He was Modi
Foundation Chair Professor as well as Dalmia Chair professor. He has authored/co-authored more
than 9 text books and 14 research books/monographs; more than160 research papers in Journals of
national and international repute. Recently, his paper on “Capital Budgeting Decisions: Evidence
from India” has been adjudged with the “Literati Award” by Emerald for Outstanding Excellence in
Research.
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