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Info on EVA
Human Resources » Corporate Social Responsibility

Chrm Message From: tania Total Posts: 26 Join Date: 20/01/2009
Rank: Executive Post Date: 28/06/2009 07:13:00 Points: 130 Location: India

Dear Friends,
Can anyone enlighten me on EVA? To make your task easier, I am sharing with you what I know. Shareholders are interested in rate of return on their investment, so if the company in which it has invested it not in a position to pay what they would have otherwise got, shareholder will lose interest in the company. So company should earn more than cost of capital.

EVA= Net operating profit after tax- cost of capital So higher EVA keeps everyone happy!

Companies like TCS, Godrej have decided to link variable pay to EVA. Scheme in short works like this.

There are 3 parameters on which payment is made
1. Performance of company ( if EVA is zero or -ve , then no bonus)
2. Performance of your team/department ( contribution of your dept to EVA)
3. Finally , your own contribution ( based on your performance appraisal)

Each parameter is given certain weightage ( say 20,30,50), then based on final score ( addition of weighted score) you end up getting bonus/perf bonus/variable pay etc.

Now comes the tricky part- you are paid only 1/3 of amount, rest goes in what is called as "bonus bank" but even this amount is at risk, you lose the amount or get reduced amount if in future company's performance suffers. or if your leave organisation earlier still you lose the amount.

Somehow I feel the scheme is unfair for following reasons:

1.Cost of capital is India is very high( say 15%), compared to developed economies, so EVA is always less than what it will be in developed nations.

2.Performance of company also depends on factors over which organisation has no control, so employees are penalized for factors beyond their control, though they may have worked equally hard.

3.Unlike stock options, the amount that goes in bonus bank has been earned by employee, to deprive him of that amount if he leaves the company is unjust.

4.Lastly, how do you calculate EVA for support functions like HR?