The lack of controllability of EVA explains its decline a field study

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Fishing for excuses and performance evaluation

We study a principal-agent model in which the agent can provide ex post additional relevant information regarding his performance. In particular, he can provide a legitimate excuse, that is, evidence that a poor result is only due to factors outside his control. However, building a convincing case requires time, time that is not spent on exerting productive eff ort, and thus generating information represents an opportunity cost. We obtain necessary and suffi cient conditions for the principal to prefer a policy of adjusting ex post the performance measure for the information provided by the agent to a policy of conforming to a result-based system with no adjustments. The risk aversion and a possible limited liability of the agent play an important role in the analysis. This paper clarifi es the issues asso- ciated with the so-called \excuse culture" prevailing in some organizations

L'EVA et la théorie des incitations : une étude de cas

Though EVAâ has become a text book reference as a performance measure, there remains much to be learned about the actual implementation of the corresponding compensation systems. EVA systems have two distinguishable features : the use of an external standard related to the financial market (as opposed to more traditional (budget) internal systems) and the fact that EVA concerns the managers of profit centers and not only the top executives. This paper investigates an actual implementation of an EVA system through a case study. This case study provides detailed information on how the performance measure has been cascaded down in the organization and how the standards were constructed. After two years of operations the actual bonus paid by the system are analyzed as well as some qualitative feed back from the managers involved. Based on this case study, and as opposed to the general claims put forward by its advocates, it is argued that EVA systems do not by-pass the traditional congruence controllability dilemma that ordinarily applies to all compensation systems in firms. This analysis is consistent with the empirical limitations of EVA systems as reported in the literature.Cet article analyse un système de compensation mis en œuvre dans une grande entreprise multinationale au niveau de ses centres de profit. Le système de compensation étudié est inspiré de l'EVAâ. Un tel système a deux caractéristiques importantes : il repose sur un standard externe relié au marché financier (par opposition à des systèmes internes basés sur des standards budgétaires), il est décomposable dans l'entreprise jusqu'à des niveaux assez fins correspondants à ses centres de profit. L'étude a porté sur la mise en place du système et sur les deux années qui ont suivi. Elle permet d'avoir des observations détaillées sur le calibrage du système, les résultats quantitatifs en termes de bonus et sur les réactions plus qualitatives des managers concernés. Contrairement aux allégations de ses protagonistes, cette étude de cas suggère que les systèmes EVA ne permettent pas de d'affranchir du dilemme congruence contrôle qui est une constante dans la plupart des systèmes de compensation. Cette remise en cause permet de rendre compte des limites rapportées dans la littérature concernant la mise en œuvre des systèmes EVA

Environment factor, private information and the controllability principle

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The lack of controllability of EVA explains its decline a field study

This paper investigates the properties of EVA compensation schemes, which were considered as a major managerial innovation of the 90’s. The analysis is carried on in the framework of contract theory and based on a six year longitudinal case study. Such schemes induce highly volatile bonuses compared to more traditional ones. This is interpreted as a loss of controllability, where controllability is defined as the controllability of their performance measured by managers. The role of the target setting, based on external standards, and the absence of renegotiation are of particular significance in explaining this loss. This analysis explains the difficulties encountered in the implementation of these schemes and their relative decline

Environment factor, private information and the controllability principle

Should a manager be held accountable for uncontrollable environment factors like foreign exchange rate or oil price? To address this question, we develop a multi-task agency model where the agent has a limited liability. The profit of the firm is impacted by a stochastic environmental factor which changes the relative productivity of tasks, and whose realization is public ex-post. The agent-manager observes an early private signal of the environment and thus knows better than the principal which task it is optimal to undertake. For the principal, there is therefore a trade-off between congruity (induce the agent to use her information as the principal would use it) and agency costs (in particular to induce the agent to reveal this information).In our model, it is costly to make the agent responsible for the environment, not because the environment is uncertain, but because the agent has a better knowledge of the environment when the task is chosen. The optimal contract depends on the informativeness of the signal. For an highly informative signal the environment is not filtered from the performance measure to encourage a congruent action from the agent. For a poorly informative one, the environmentis eliminated and the agent never reacts to it: congruity is given up to decrease the agency cost. We use this model to discuss the application of the controllability principle in the case of external environment factor

Responsibility Accounting with a Privately Informed Agent

The application of the controllability principle to eliminate external factors remains problematicinpractice. A key is sue concerns the fact that the manager may get some private pre-decision signal about this external environment and may use this information to mitigate or amplify its impact. The question is analyzed in a multi task agency model in which the agent has a limited liability, thus earns rents and is not indiferent to the task performed. Under certain conditions, it is proved that the optimal contractonlyse lective lye liminates the impact of the environment. It does neutralize it if the agent reports a signal of low impact of the environment but does not filter it out if the agent reports a signal of high impact