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.

(ArticlesBase SC #1300401)

DR.R.SRINIVASAN - About the Author:

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. .