Executive compensation and the EVA and MVA performance of South African listed companies

Abstract

The media regularly report a growing incidence of non-alignment of
executive pay and performance, and in some cases, no link between
the two whatsoever. The advent of new measures of shareholder wealth such as economic value added (EVA) and market value added (MVA) have allowed some companies to link executive remuneration to shareholder wealth creation. The purpose of this study is to test the relationship between executive remuneration of South African listed companies and EVA and MVA, as well as traditional performance measures such as return on assets (ROA) and return on equity (ROE). The findings indicate that there is indeed a significant relationship between executive remuneration and EVA and MVA, but that the correlation is better between executive remuneration and ROA and ROE. It is concluded that South African companies need to shift the emphasis away from traditional performance measures to value-creation measures when designing and implementing
executive compensation plans.

Key words: executive compensation, economic value added (EVA), market value added (MVA), return on assets (ROA), return on equity (ROE), weighted average cost of capital (WACC)