S. David Young
Professor of Accounting and Control
Corporate Governance; Investors, Stakeholders and Accountability;
In their book Outperform with Expectations-Based Management, Tom Copeland and Aaron Dolgoff (C&D) argue that conventional approaches to value-based management are flawed because they fail to take account of investor expectations about future performance. C&D propose an annual measure of performance called "EBM" that is equal to "the difference between actual and expected economic profit (EP) or EVA."They argue that EBM is a superior measure of performance because changes in earnings expectations explain far more of the variation in shareholder returns than any other measure, including EVA and EPS. They propose a corporate incentive plan based on total shareholder return versus peers, but offer no specific design for an incentive plan based on EBM.The authors show that EBM is not a new measure, but essentially the same measure that many EVA companies have used for years as the basis for internal performance evaluation and incentive compensation. The authors describe a widely used EVA bonus plan design that gives managers a fixed percentage interest in "excess ?EVA"-that is, the change in EVA in excess of the expected improvement in EVA that is reflected in the company's current share price.The authors close by discussing our approach for dealing with a problem that confronts all single-period economic profit performance measurement systems-how to provide an incentive to make major long-term investments, such as acquisitions, that have positive net present value but reduce economic profit in the short run.