ECONOMIC VALUE ADDED- A NEW DIMENSION IN FINANCIAL MANAGEMENT
Financial management structure refers to financial measures, policies, methods, and procedures that guide the strategy and operations of a firm. It includes setting up of financial goals, developing long term strategic plans and short term profit plans, making capital investment and disinvestment decisions, measuring operating performance, determining incentive compensation, and communicating with investors. Companies often do not do these things in a unified, systematic, and unified manner. Corporate financial goals are defined in terms of earnings per share and return on net worth; individuals lines of business are evaluated in terms of return on assets; capital investment is analyzed in terms of discounted cash flow; acquisitions are judged on the basis of contribution to earnings growth; department are evaluated with reference to budgeted cost or profit figures; incentive reward schemes are based on capriciously determined targets; and investor communication is for the most part in terms of earnings per share and divided policy.
The EVA is based on the argument that provides a single, unified, and accurate measure of performance. It thinks well forward looking valuation and capital budgeting analysis with actual performance measurement. For these reasons and more EVA may be used for goal setting and business planning, performance evaluation, bonus determination, investor communication, capital budgeting ands valuation.
EVA is an admirable bed rock on which an integrated financial management system can be constructed as it has the following features or distinctiveness:
1. It is a recital measure that ties directly, theoretically as well as empirically, to shareholders wealth creation.
2. It converts accounting in sequence into economic reality that is readily grasped by non-financial managers. It is a simple yet effective way of teaching business literacy to everyone.
3. It serves as a guide to every decision from strategic planning to capital budgeting acquisitions to operating decisions.
4. As the basis for creative compensation, it truly aligns the attention of managers with that of shareholders and makes management think and act like owners.
5. It is an effective tool for investor communication.
6. It serves as an anchor for an internal system of corporate governance that motivates everyone to work co-operatively and enthusiastically to achieve the best attainable performance.
EVA and incentive compensation:
The purpose of an incentive compensation plan (bonus plan) is to motivate employees to work harder and smarter so that the organizational performance is maximized. Unfortunately, the incentive compensation plans used by most companies fail to accomplish these objectives. These plans induce managers to be more conservative than the shareholders; they diminish incentive and motivation by paying too little for outstanding performance or too much for inferior performance they encourage managers to negotiate easily achievable targets, by gaming the system finally they give managers an additional incentive to lower performance when there are signs that the actual recital may turn out to be significantly higher than the un-ambitious targets. The centerpiece of the EVA is a inimitable bonus plan that overcomes these limitations and aligns the interest of managers with shareholders. The Key elements of the EVA bonus plan are:
1. Bonus is linked to increase in EVA
2. There is no floor or ceiling on the bonus
3. The target bonus is generous
4. A bonus bank is established
Finally, from the aforesaid discussions, it is felt that, Financial decisions result in the commitment and recommitments of funds in business operations enabling the management to discharge efficiently numerous functions related to production, marketing and personnel areas which in turn affect the extent of risk, profitability, , size and growth of the firm and ultimately the value-added or net worth of the firm.
Dr.R.SRINIVASAN is a Post graduate in commerce and Management. He received his doctoral degree from Alagappa University in 1997. He currently teaches financial management and Research Methodology Subjects in Post graduate and Research Department of Corporate Secretaryship at Bharathidasan Government College for Women (Autonomous), Pondicherry University, Puducherry. Before Joining BGCW, he was teaching in SNR College, Coimbatore, Sindhi college, Chennai& T.S.Narayanasamy College, Chennai for eight years. He was with the industry for a short term at Salzar Electronics Pvt. Ltd, Coimbatore. He has about 20 years of teaching experience and having research experience of 15 years. His interests are in Accounting and finance, Capital Market, Quantitative Methods. He underwent the Faculty Development Programme at Indian Institute of Management Ahmedabad during 2000-01. He has presented 20 papers in national and international conferences and has published twenty papers in the areas of Finance and Human resource Management in National Journals. Co-authored a book titled, ?Investors Protection, published by Raj Publications, New Delhi He has delivered lectures in contemporary finance topics at Pondicherry University. He is involved in consultancy projects for Godrej Saralee, Chennai in the areas of Statistical Applications. He has supervised a number of research projects in the area of corporate finance and Human Resource Management. He is the Board of examiner in corporate Secretaryship and Management for the past two decades.
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