Free Introducing EVA at ISS: A Better Way to Evaluate CEO Performance and Compensation? Case Study Solution | Assignment Help

Gary F. Smith
Written by Gary F. Smith
Publish Date: 2024-11-03

Harvard Case - Introducing EVA at ISS: A Better Way to Evaluate CEO Performance and Compensation?

"Introducing EVA at ISS: A Better Way to Evaluate CEO Performance and Compensation?" Harvard business case study is written by Jonas Heese, Charles C.Y. Wang, James Weber. It deals with the challenges in the field of Accounting. The case study is 31 page(s) long and it was first published on : Jan 13, 2022

At Fern Fort University, we recommend that ISS implement EVA (Economic Value Added) as a primary performance metric for its CEO and senior management, alongside traditional financial metrics. This will align executive compensation with shareholder value creation, foster a long-term investment mindset, and improve overall financial performance.

2. Background

This case study focuses on ISS, a global facility services company facing challenges in its financial performance and CEO compensation structure. The company's CEO, Jeff Gravenhorst, is under pressure from the board to improve profitability and shareholder value. The board is considering adopting EVA as a performance metric to better align executive compensation with shareholder interests.

The main protagonists are Jeff Gravenhorst, the CEO, and the ISS board of directors.

3. Analysis of the Case Study

The case study highlights several key issues:

  • Financial Performance: ISS is struggling to achieve its financial targets, with low profitability and declining stock prices. The company faces intense competition in a fragmented market.
  • CEO Compensation: The current compensation structure based solely on traditional financial metrics like earnings per share (EPS) and return on equity (ROE) does not adequately incentivize long-term value creation.
  • EVA as a Performance Metric: EVA, a measure of economic profit, considers the cost of capital and aims to capture the true value generated by the business. It can provide a more comprehensive view of performance than traditional metrics.

Framework: We can analyze the case using a framework that considers the following aspects:

  • Financial Analysis: Evaluate ISS's financial performance through key metrics like profitability, cash flow, and shareholder value.
  • Corporate Governance: Analyze the board's role in setting compensation structures and aligning executive incentives with shareholder interests.
  • Strategic Analysis: Assess ISS's competitive position, growth strategy, and potential for value creation.
  • Operational Analysis: Examine ISS's operational efficiency, cost structure, and potential for improvement.

4. Recommendations

  1. Implement EVA as a Key Performance Metric: ISS should adopt EVA as a primary performance metric for its CEO and senior management. This will provide a more comprehensive view of value creation, considering the cost of capital and long-term profitability.

  2. Develop a Balanced Scorecard: Alongside EVA, ISS should implement a balanced scorecard that includes other key performance indicators (KPIs) across various aspects of the business, such as customer satisfaction, employee engagement, innovation, and environmental sustainability.

  3. Align Compensation with EVA Performance: A significant portion of executive compensation should be linked to EVA performance. This will incentivize executives to focus on long-term value creation and make strategic decisions that benefit shareholders.

  4. Communicate the EVA Framework: ISS should clearly communicate the EVA framework to employees, shareholders, and stakeholders. This will enhance transparency and understanding of the company's performance and its long-term strategy.

  5. Provide Training and Support: ISS should provide training and support to employees, particularly managers, to understand and implement EVA in their decision-making processes.

5. Basis of Recommendations

These recommendations align with the following considerations:

  • Core Competencies and Consistency with Mission: Implementing EVA aligns with ISS's mission of providing high-quality facility services while creating long-term value for stakeholders.
  • External Customers and Internal Clients: EVA encourages a focus on customer satisfaction and operational efficiency, which benefits both external customers and internal clients.
  • Competitors: Adopting EVA can provide ISS with a competitive advantage by demonstrating a commitment to long-term value creation and attracting investors.
  • Attractiveness ' Quantitative Measures: EVA is a widely accepted and robust measure of economic profit, making it a strong indicator of value creation.

6. Conclusion

Implementing EVA as a primary performance metric for CEO and senior management, alongside a balanced scorecard and aligned compensation structure, will significantly improve ISS's financial performance and shareholder value creation. This approach will incentivize long-term thinking, enhance transparency, and foster a culture of accountability.

7. Discussion

Other alternatives not selected include:

  • Maintaining the current compensation structure: This would continue to incentivize short-term performance and potentially hinder long-term value creation.
  • Adopting a different performance metric: While other metrics exist, EVA is a well-established and widely accepted measure of economic profit.

Key assumptions include:

  • The board's commitment to implementing EVA: The board must be fully committed to adopting and implementing EVA as a performance metric.
  • Employees' understanding and acceptance of EVA: Employees need to understand the rationale behind EVA and its impact on their work.
  • The company's ability to achieve its financial goals: Implementing EVA requires a commitment to improving financial performance and achieving long-term profitability.

8. Next Steps

  1. Develop a detailed EVA implementation plan: This plan should outline the specific steps involved in adopting EVA, including data collection, calculation, and communication.
  2. Communicate the plan to stakeholders: The board should clearly communicate the EVA implementation plan to employees, shareholders, and other stakeholders.
  3. Pilot test the EVA framework: Before full implementation, ISS should pilot test the EVA framework in a specific division or department to assess its effectiveness and identify any potential challenges.
  4. Monitor and evaluate EVA performance: ISS should regularly monitor and evaluate the impact of EVA on its financial performance and shareholder value creation.

By taking these steps, ISS can successfully implement EVA and reap the benefits of aligning executive compensation with long-term value creation.

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Case Description

In early 2019, Anthony Campagna, the global director of fundamental research at ISS EVA, a unit of the proxy advisory firm Institutional Shareholder Services (ISS), was preparing to release ISS's analyses of public company performance and CEO compensation ahead of Say on Pay (SOP) voting. ISS's reports helped institutions and other investors determine how to vote their shares at annual shareholder meetings. The report's assessment of CEO compensation for SOP relied on the degree of alignment between a CEO's industry-relative compensation and the firm's industry-relative performance. ISS had long used total shareholder return (TSR)-a measurement based on a company's stock price appreciation and dividend payouts-to measure company performance. In 2019, for the first time, ISS supplemented the TSR measure with economic value added (EVA)-a measurement based on accounting data that combined operating profit and a charge for capital-to measure performance. ISS believed that using EVA as a complement to TSR painted a more complete picture of company performance than TSR alone. EVA was, however, a far more complicated and not widely understood performance metric. Interpreting EVA for certain types of firms-young, high-growth, investment-intensive-could also be challenging. Campagna wondered how market participants would respond to ISS's use of EVA in its voting recommendations, particularly when TSR and EVA could make company performance look quite different. Did the benefits of EVA make managing its complexities worthwhile? Was EVA too complicated for investors to understand? Would EVA work equally well for young and high-growth firms as for mature firms? How might Campagna best promote the use of EVA?

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