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EVA and the Controllability-congruence Trade-off: An Empirical Investigation

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  • François Larmande
  • Jean-Pierre Ponssard

Abstract

Incentives theory suggests that compensation schemes should be analyzed along two dimensions: controllability and congruence. Most schemes cannot satisfy both criteria at once. EVA bonus schemes, a major managerial innovation of the 90’s, favor the congruence criterion. This paper questions ist properties along the controllability dimension. The question is addressed through an in-depth case study: after three years in operation the actual bonuses paid by the system, as well as qualitative feedback from the managers involved, are analyzed. It is argued that EVA bonus schemes may have a major controllability problem.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2004/wp-cesifo-2004-08/cesifo1_wp1257.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1257.

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Date of creation: 2004
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Handle: RePEc:ces:ceswps:_1257

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Keywords: EVA management compensation; controllability-congruence trade-off; compensation standards;

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References

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  1. Jerold L. Zimmerman, 1997. "Eva And Divisional Performance Measurement: Capturing Synergies And Other Issues," Journal of Applied Corporate Finance, Morgan Stanley, Morgan Stanley, vol. 10(2), pages 98-109.
  2. John M. Abowd & David S. Kaplan, 1999. "Executive Compensation: Six Questions that Need Answering," NBER Working Papers 7124, National Bureau of Economic Research, Inc.
  3. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 7(0), pages 24-52, Special I.
  4. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(3), pages 598-614, June.
  5. Stephen Riceman & Steven Cahan & Mohan Lal, 2002. "Do managers perform better under EVA bonus schemes?," European Accounting Review, Taylor & Francis Journals, Taylor & Francis Journals, vol. 11(3), pages 537-572.
  6. Wallace, James S., 1997. "Adopting residual income-based compensation plans: Do you get what you pay for?," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 24(3), pages 275-300, December.
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Cited by:
  1. Olivier Saulpic & Jean-Pierre Ponssard, 2008. "Les systèmes de pilotage : une relecture critique inspirée des travaux de Simons," Post-Print, HAL halshs-00525975, HAL.
  2. Berland, Nicolas & Ponssard, Jean-Pierre & Saulpic, Olivier, 2005. "Une typologie des systèmes de contrôle inspirée du cadre théorique de Simons," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/3053, Paris Dauphine University.
  3. Nicolas Berland & Jean-Pierre Ponssard & Olivier Saulpic, 2006. "Recurrent Attempts to Renovate Management ControlRevisited through a Simons' Perspective," Working Papers, HAL hal-00243033, HAL.

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