NEW YORK--(BUSINESS WIRE)--Pay Governance, a major board-level executive compensation advisory firm, has released a new study on Institutional Shareholder Services’ (ISS) change to its methodology for determining say on pay voting recommendations.
ISS recently changed the metric used in its secondary quantitative pay-for-performance (P4P) test and will now use economic value added (EVA) as the sole performance metric. This change suggests that ISS believes EVA is more closely correlated with total shareholder return (TSR) than other metrics and therefore the best financial metric for evaluating company performance.
Ira T. Kay, Managing Partner at Pay Governance, explained the reasoning behind the study. “We tested a simple theory — if ISS is correct, companies with positive or higher percentage growth in EVA should experience positive/superior levels of TSR. This is the basic premise of the ISS P4P test using EVA.”
Pay Governance found that other financial metrics have similar or better correlation to TSR than EVA based on an analysis of S&P 500 companies from 2016 to 2018. Specifically, EBITDA growth was more highly correlated with TSR than EVA growth. Most companies (71 percent) with negative EVA growth had positive TSR. This helps to explain why the correlation of EVA growth and TSR is not stronger. In theory, companies with negative EVA growth would be expected to have negative TSR.
“While EBITDA growth was more highly correlated than EVA growth, EVA works well as a performance evaluation/incentive metric for some companies,” said Pay Governance Principal Marizu Madu.
Pay Governance concluded that EVA should be strategically evaluated if selected as part of a portfolio of incentive metrics for executive motivation and shareholder-alignment purposes.
Pay Governance LLC is an independent consulting firm focused on delivering advisory services to compensation committees. The consultancy also advises the management of companies in situations in which the firm does not serve as the independent committee advisor. Pay Governance has locations throughout the United States in New York, Boston, Detroit, Philadelphia, Pittsburgh, Chicago, Dallas, Cleveland, Charlotte, St. Petersburg, San Francisco and Los Angeles. The firm also has strategic affiliate relationships with Pay Governance Japan and Pay Governance Korea. For more information, visit www.paygovernance.com.