31-05-2013, 01:56 PM
The development of a value creating competencies index: The economic value added (EVA) approach
Abstract
Shareholders always expect business executives to create real economic value and wealth for their
organisations, and accordingly, compensate these executives based on the economic value that has
been created. Economic value added (EVA) is regarded as the true measure of economic value and has
since been utilised as a tool for executives’ compensation. Inherent to compensating executives on
EVA, is the underlying assumption that executives were selected on their ability to create value.
However, studies fail to indicate where EVA has been utilised in the selection of executives. This
renders a disconnection between selection and performance measure. This article put forward the
argument that attributes and competency measures are some of the measures that can predict
performance. Based on this, conceptualises that attributes and competencies that are linked to EVA be
identified in order to develop a competency measure that is based on EVA.
INTRODUCTION
How can shareholders consistently expect executives to
create value and wealth for their organisations and
compensate executives based on value creation without
ensuring that such value creating qualities and
competencies are innate to executives? In recent years
maximising shareholder value has become the new and
widely accepted corporate paradigm. Studies by Stern et
al. (1991) and Stewart (1991, 1994) pioneered the
development of economic value added (EVA), a financial
measurement for real economic value. These studies
assert that EVA stands well out in the crowd as the single
best measure of value creation for an organisation on a
continuous basis. This notion is also supported by Ward
and Price (2008). Subsequent to the establishment of
EVA, many studies have reported the different uses and
adoptions of EVA; these studies are reflected in the work
of Sharma and Kumar (2010). It is worth noting that these
previous studies acknowledge the link between economic
value creation and executive’s performance and further
recognises how the executives’ performance is linked to
their compensation.
MEASURES OF VALUE
Researchers including Burksaitiene (2009), Goldberg
(1999), Morard and Balu (2009); Yao et al. (2009) and
Young and O'Byrne (2000) posit that the primary
objective of a business enterprise is to create value for
both shareholders and society. However, the concept of
shareholder value is not a new one - it had been reported
as early as in the late 19th century by scholars like
Marshall (Nam et al., 2009). As a result, there are many
ways in which organisational value can be measured,
and these measures of value highlight that organisational
value can be measured by determining the excess
returns between an organisation’s operating profits and
the capital invested to generate such profits, within a
specified reporting period.
BUSINESS QUO VADIS?
Previous studies affirm that executive competencies have
been shown to be related to superior organisational
performance. Accordingly, other studies have shown and
argued that competency models and competency testing
are some of the valuable tools available to organisations
when selecting executives. Reports such as that of the
ANOVA communications group (2008) assert that
‘personality testing’ and ‘ability testing’, contribute to 38
and 54% respectively of job performance predictors.
Studies by Robie et al. (2008) and Tyler and Newcombe
(2006) confirmed that personality traits assessment is
related to managerial and work performance.