value based management practices some evidence from the field 2003 management accounting research

Management Accounting Research 14 (2003) 235254

Value Based Management practicessome evidence from the field

Teemu Malmi , Seppo IkheimoDepartment of Accounting and Finance, Helsinki School of Economics, P.O. Box 1210, FIN 00101 Helsinki, Finland

Received 31 July 2001; accepted 10 June 2003

Abstract

Value Based Management (VBM), and especially Economic Value Added (EVATM),1 has attracted considerableinterest among organisations in recent years. These concepts can be applied to capital budgeting, valuation, man-agement control, and incentive compensation. Despite the growing number of applications, we have only limitedindependent research-based evidence on how these concepts are actually applied. However, this can be considerednot only an essential step in research investigating the benefits of VBM [cf. Ittner, C.D., Larcker, D.F.,1998. Inno-vations in performance measurement: trends and research implications. Manage. Acc. Res. 10, 205238], but alsoon its limitations. With the aid of six Finnish-based organisations from five different industries, we illustrate thediversity of actual use of VBM. Our results indicate that for some organisations VBM is merely rhetoric, whilefor others it seems to have an impact on both decision making and control system, taking various forms from onefirm to another. In some organisations, application of VBM is restricted only to the highest levels of hierarchy,whereas in others it covers the whole organisation. However, in none of the studied organisations is VBM appliedin as comprehensive a manner as suggested in the normative literature. This multitude of different ways in whichVBM is actually used in practice raises some problems regarding the study of VBM and its benefits. In particular,the adoption of EVATM, as measured with EVATM based bonuses [see e.g. Wallace, J.S., 1997. Adopting residualincome-based compensation plans: do you get what you pay for? J. Acc. Econ. 24, 275300; Kleiman, R., 1999.Some evidence on EVA companies. J. Appl. Corp. Finance 12, 8091], is seriously challenged. 2003 Elsevier Ltd. All rights reserved.

Keywords: Value Based Management; Economic Value Added (EVATM); Field study; Management control practice;Decision-making practice

1. Introduction

Value Based Management (VBM) and especially Economic Value Added (EVATM) has attracted con-siderable interest among organisations in recent years. Ittner and Larcker (1998) discuss innovations in

1 EVATM is a trademark of Stern, Stewart and Co. Corresponding author. Tel.: +358-9-43138471; fax: +358-9-43138678.E-mail addresses: [email protected] (T. Malmi), [email protected] (S. Ikheimo).

1044-5005/$ see front matter 2003 Elsevier Ltd. All rights reserved.doi:10.1016/S1044-5005(03)00047-7

236 T. Malmi, S. Ikheimo / Management Accounting Research 14 (2003) 235254

performance measurement in their recent article, selecting economic value measures as one of the threemain themes that should be focused on by researchers. They find the long-term benefits of economicvalue measures to be the most pressing research topic under this theme.

Within this theme, the relatively scarce academic research examining the use of VBM has mainlycompared the success of firms having adopted VBM to those that have not (Wallace, 1997; Kleiman, 1999).Wallace (1997) found that those companies using EVATM or other residual income-based measures asthe basis for incentive compensation had higher levels of residual income than the control firms. Kleiman(1999) focused on EVATM adopters (most of which had compensation tied to EVATM) and found theirstock market performance to be significantly better than that of their industry competitors. These researchsettings implicitly assume that VBM or EVATM is applied similarly in each organisation and that the useof EVATM as a basis for compensation is a strong indication of true EVATM adoption.

In the other areas of management accounting, evidence shows the divergent use of management ac-counting methods, such as ABC and Balanced Scorecard (Gosselin, 1997; Kaplan and Norton, 2001;Malmi, 2001). Thus, one may expect that companies could vary with respect to their VBM use as well.Such variation has even been acknowledged in the normative VBM literature (Martin and Petty, 2000,pp. 228229), though the precise nature of these differences remains unexplored. Nevertheless, differ-ences in use might have important implications for study of the long-term benefits of VBM or EVATM,since the performance implications may depend upon the nature of the use.

The aim of this study is to find out how the concept of VBM is applied in practice. We will first examinethe normative literature on VBM, attempting to identify core elements of VBM. We will then examineorganisations that have publicly announced their adoption of VBM. Differences between the normativeliterature and the actual practices could thus provide us with insights into how to study the benefits of VBM.

The paper is organised as follows. Section 2 describes normative literature on VBM. Our researchmethod is discussed in Section 3, and Section 4 presents the analysis of empirical material as well as theresults. The results and further research are discussed in the final section.

2. Value based management literature

It is not quite clear what we should understand by the term VBM. In the following, we first discuss theframework presented by Ittner and Larcker (2001). We then examine the main arguments as presented inthe normative literature, and conclude by presenting the framework to be used in our empirical inquiry.

Ittner and Larcker (2001), building on normative VBM literature, suggest that VBM consists of sixbasic steps:

1. Choosing specific internal objectives that lead to shareholder value enhancement;2. Selecting strategies and organisational designs consistent with the achievement of the chosen objec-

tives;3. Identifying the specific performance variables, or value drivers, that actually create value in the

business given the organisations strategies and organisational design;4. Developing action plans, selecting performance measures, and setting targets based on the priorities

identified in the value driver analysis;5. Evaluating the success of action plans and conducting organisational and managerial performance

evaluation;

T. Malmi, S. Ikheimo / Management Accounting Research 14 (2003) 235254 237

6. Assessing the ongoing validity of the organisations internal objectives, strategies, plans, and controlsystems in light of current results, and modifying them as required.

Ittner and Larckers description represents a fairly good example of the normative VBM approach. Inaddition to the six steps outlined above, Ittner and Larcker (2001) suggest that VBM integrates variouspractices, including Balanced Scorecard and strategic management accounting systems. We considersuch a broad view of VBM to be rather problematic, as it provides researchers or managers with littlehelp in distinguishing between the various alternative approaches to building management accounting andcontrol systems (cf. Otley, 1999). For example, Balanced Scorecards, or strategic management accounting,though sometimes applied together with VBM, can also be used for purposes other than shareholdervalue enhancement, e.g. in the public sector. Therefore, these should not be included under the conceptof VBM.

Let us next turn to the normative literature on VBM to examine the type of prescriptions that havebeen presented regarding the above six steps. The literature contains prescriptions on the design of amanagement control system, including objectives, performance evaluation, target setting and rewards.Moreover, a number of examples have been presented to illustrate how the adoption of VBM shouldimpact on decision making, both at strategic and operational levels. This impact on decision making ispartly assumed to be a consequence of adopting a certain management control system design, and partlyas a consequence of using VBM related tools for assessing, e.g. strategic investments (see e.g. Martinand Petty, 2000).

2.1. Objectives, performance evaluation and target settingsteps 1, 3 and 4 (Ittner and Larcker, 2001)

The goal of the company is to deliver value to investors (Knight, 1997, p. 4). This value creation processis best measured within the company using an economic profit metric, given the amount of total capitalused to generate those profits (Martin and Petty, 2000, p. 81). The most commonly used metrics includethe Economic Value Added (EVATM) framework introduced by Stern Stewart & Co., and the Cash ValueAdded (CVA) model by Boston Consulting Group and Holt Value Associates (Martin and Petty, 2000,p. 111).

These metrics and their value drivers should solely be used to evaluate performance from the top-to-bottom of an organisation (Black et al., 1998, p. 90). By accounting correctly for the economics of thebusiness and by subtracting the cost of all resources required to produce revenues, including the costof capital, EVATM accurately captures the combined productivity of all factors of production in a singlemeasure (Ehrbar, 1998). Traditional performance metrics such as earnings per share (EPS), book value(BV), return on equity (ROE), return on assets (ROA) and return on invested capital (ROIC) . . . do apoor job of capturing the three fundamental determinants of value creation: the amount, timing, and riskof the future cash flows of a company (Morin and Jarrell, 2001, p. 309), and the use of these accountingfigures should be abandoned when VBM is adopted (Ehrbar, 1998, p. 67).

In EVATM companies, target setting is based on calculations, rather than negotiations. Target setting iscalculated from the current level of EVATM, taking into consideration any changes in the circumstances(Martin and Petty, 2000). Although zero-EVATM is the minimum acceptable level of EVATM, the in-heritance effect remains in the target setting (Otley, 1999). At the lower levels of organisations, targetsshould be based on measures that can be affected by employees. Hence, the focus should be on the valuedrivers that simulate market value creation (Morin and Jarrell, 2001).


2.2. Rewards

In the VBM literature, it is assumed that target setting cannot be effective without linking it to com-pensation. Although the VBM framework introduced by Ittner and Larcker does not explicitly mentionrewards, compensation has been one of the major themes in the normative literature. Moreover, researchers(Wallace, 1997; Kleiman, 1999) have used compensation tied to EVATM or other residual income metricsas a sign of true VBM adoption.

Compensation strategy is an essential link between strategy formulation and implementation. A suc-cessful compensation strategy decomposes the business strategy into a series of value drivers and appro-priate time horizons, and creates performance incentives to link employee actions with changes in thevalue drivers (Morin and Jarrell, 2001, p. 349). The fundamental premise underlying VBM systems issimple: what a firm measures and rewards gets done (Martin and Petty, 2000, p. 160).

Stern Stewart & Co. recommends that bonuses be paid based upon changes in EVA rather thanthe level of EVA for the period (Martin and Petty, 2000, p. 171). This leads to constantly increasingrequirements on the performance. The bonuses should be paid without any upper limit because moreEVATM produces more wealth (Steward III, 2002). To avoid short-term focus, banking is advocated.In banked compensation plans only a portion of the compensation earned in 1 year is paid out in thatyear. The rest accrues in a bank and is paid out depending on the performance of later years (Morin andJarrell, 2001, p. 356).

Equity-based compensation, such as stock options, could be used to further align shareholder andmanager interests (Martin and Petty, 2000, pp. 172173), but they should be targeted to higher levelmanagement, since for others [s]tock ownership is simply too abstract and too remote to have a stronginfluence on behavior (Ehrbar, 1998, p. 99). Normal stock option plans are unnecessarily expensivesince they pay for all increases in share price, as well as that caused by general changes in the market.Therefore, options should be granted with an exercise price that rises each year in line with the cost ofequity capital. The number of options an executive gets each year is determined by the size of his orher EVATM bonus. In effect, the manager uses a portion of the cash bonus to buy the options (Ehrbar,1998, p. 100).

2.3. Decision making

These changes in the management control systems caused by adoption of VBM should lead to improveddecision making within the company. Or decision making could change due to VBM adoption irrespectiveof the design of the control system, as suggested in normative literature (e.g. Morin and Jarrell, 2001).These decisions are made at different levels in an organisation. Matters of strategy, such as the questionof which market your company should actually be in, are dealt with by the chairman, CEO and CFO; atthe next level down, in strategic business units, decisions about capital expenditure and investment in (forinstance) product development or new distribution networks are taken; while at operating unit level itsa question of detailed planning and budgeting (Black et al., 1998, p. 90).

2.4. Selecting strategies and strategic decisionsstep 2

Morin and Jarrell (2001) argue that [t]he specific objective of the strategic analysis module of theVBM framework is to formulate appropriate value-creating strategies across all the business units of


the company (pp. 219220). The VBM literature does not explicitly say anything about strategies perse. What VBM does, however, it offers tools to link strategy alternatives to shareholder value (e.g., onbusiness strategy, Rappaport, 1999; McTaggert et al., 1994; Day and Fahey, 1990; and on corporatestrategy, Trigeorgis, 1996; Porter, 1998; Oster, 1999; see Morin and Jarrell, 2001, pp. 219278). Strategiclevel decisions, like capital investments, acquisitions and divestments, industries in which to remain andwhere to invest, are solely outcomes of VBM metrics without any strategy decision making beyond VBM.These tools will be used, and strategising will be located, within the business units. Headquarters willbecome very lean with the dismantling of large strategic planning departments (Mouritsen, 1998).

2.5. Action planning and operational decisionsstep 4

It is argued that VBM will have little effect on corporate strategy, business strategy and operating-leveldecisions, as the same metrics and arithmetic are valid at all levels. Hence, at the operational level, VBMshould lead to big changes in working-capital management and capital appropriations, since managerswill automatically take into account the balance-sheet impact of their decisions (Ehrbar, 1998).

2.6. Summary

The normative literature does not add much to the last two steps in the VBM framework presentedby Ittner and Larcker. The prescriptions provided in the VBM literature relate both to the design of acontrol system, the types of decisions that are assumed to follow, as well as the heuristics to be used inthe decision-making process. Hence, the literature suggests that VBM means the use of certain controlprinciples, which are assumed to have an impact on decision making. On the other hand, the VBM

Table 1Summary of normative VBM solutions for management control and decision making

Dimension of VBM use VBM solutions

Management controlObjectives and strategies Maximisation shareholder wealth. EVATM metrics (or its value drivers) as a single goal

throughout the organisationA value-creating strategy is the only possible solution, though silent about the type ofstrategy per se. Business units are responsible for strategic planning

Performance measurement Performance measured using economic profit metrics and their value drivers fromtop-to-bottom. Other measures abandoned

Target setting Improvement in the current level EVATM. Zero-EVATM minimum acceptable level.Target setting linked to value drivers

Compensation Bonuses paid are based upon changes in EVATM. Bonuses have no caps. Banking toavoid myopia. Stock options only to top management with increasing target level inline with the cost of capital

Influence on decision makingStrategic decisions Based on EVATM calculations, no room for decision making beyond; acquisitions,

strategic capital investments and divestments are made accordingly. Strategising withinthe business units

Operational decisions Both balance sheet and income statements are considered, leading to improved capitalinvestments and more efficient working-capital management


literature also suggests that certain heuristics should be used in making decisions at all levels of anorganisation. Therefore, to study the actual use of VBM in practice, it is not enough to study only theelements of the management control system. The actual decision-making process should be included inthe analysis as well.

Table 1 (first column) shows the dimensions of VBM use, which will be next examined to identifysimilarities and differences in practice. The second column contains the VBM solutions for the topic,which will be compared to actual observed practices.

3. Research method

Finnish companies provide an interesting setting due to their strong interest in VBM (PA ConsultingGroup, 1999). A survey by PA Consulting indicated that almost all (98%) CEOs of major companiesin Finland accept the basic tenants of VBM, with as many as 17% actually applying the concepts inpractice.2 To evaluate the application of VBM in Finnish companies, we conducted an interview-basedfield study. The companies were selected on the following basis. First, we defined large, mostly multina-tional Finnish-based companies from different industries that have publicly announced their intention toapply VBM. We started our selection by identifying those firms having a competitor that did not rely onVBM in order to make effective comparisons. Accordingly, five companies were eventually selected forinclusion in the study: Tamro (medical retailer), Pohjola (financial services/insurance company), Huh-tamki Van Leer (diversified/packaging), Cultor (agricultural/food processing) and TietoEnator (informa-tion technology). As Pohjola refused to participate in this study due to re-structuring of its operations, weopted to include Sampo in our study, after having discussed with its CFO about their intentions to applyVBM. We choose, as a reference case in the financial sector, a large domestic insurance co-operative(Tapiola). As Sampo did not yet have any experience in using VBM, these two companies were subse-quently excluded from our VBM analysis. Moreover, Oriola (medical retailer) which was not using VBMwas included as a reference case for Tamro. It became evident, however, that such reference cases wereof little use, and were thus excluded from this study. Nevertheless, as we proceeded with our interviews,it became apparent that we would need to find more organisations claiming to apply VBM. Therefore,two further companies were included in our study: Raisio (Agricultural/Food Processing) and Sanitec(Porcelain/Bathrooms; a member of the diversified Metra Group). Thus, six companies were ultimatelyused to illustrate the diverse use of VBM among Finnish organisations.

The companies are designated AF in order to retain anonymity. A brief description of each companyis included in Appendix A. The companies are listed according to their level of VBM adoption, withCompany A having the strongest commitment to VBM, and Company F the weakest commitment. Theorganisations are all fairly large with divisional structure. In some cases, VBM is adopted proceedingfrom the group level, while in others it is applied to one of the divisions. Some of our case companies

2 The survey included all listed companies in Finland, as well as those with a turnover of over FIM 1 billion (during the year1999 FIM 1 varied between US$ 0.16 and US$ 0.2). A similar study was also conducted in the US and several other Europeancountries. In these countries, the senior executives also believe that the key objective of senior management is to manage forshareholder value (in the US, 88%, in the UK, 96%, in the Benelux countries, 76%), whereas managing shareholder value wasput into practice in a much smaller number of companies (in the US, 13%, in the UK, 5%, in the Benelux countries, 8%). Thesefigures show that similar processes are also underway in other modern industrialised countries.


have used VBM technology for several years; one has even abandoned it, while others have only recentlyimplemented VBM.

Data for analysis are gathered through interviews and written documents. In each company we inter-viewed the CFO. In addition, the persons responsible for corporate development, the CEO and business-unitmanagers were interviewed in some organisations. Altogether, 15 persons were interviewed. Interviewswere semi-structured and lasted from 60 to 90 min. All interviews were tape-recorded. Written documentsincluded annual reports, mission statements, internal memoranda/guidelines concerning such matters asthe method of calculating EVATM and power point presentations used for internal training on VBM.

We would like to emphasise that the evidence from this type of field study provides only limited exposureto each organisation and should thus be considered preliminary. In many organisations, we could haveactually interviewed more persons. For example, had top management argued for major changes dueto VBM adoption, it would have been prudent to have also interviewed lower levels of organisations.However, since the messages focused primarily on more minor implications, we have little reason todoubt what these managers said. Moreover, since Finland is a small country, we also have, in additionto interviews, access to a number of other contacts within these organisations. These include in-housetraining, master thesis supervision, colleagues researching these organisations and friends in managerialpositions. Hence, there are number of routes available to check the validity of given arguments.

4. Results

4.1. VBM and management control

4.1.1. Objectives and strategiesA stated long-term goal for each company was to increase shareholder wealth. This is not surprising

given the results of a PA Consulting Group survey (1999), which reported that almost all CEOs of majorcompanies accept the basic tenants of VBM. Those companies that had adopted EVATM also indicatedthis in their annual report by either underlining the importance of shareholders or directly stating that theEVATM was adopted as a managerial control system to promote shareholder interest.3

VBM was adopted to foster two different strategic orientations. Two of the studied organisationsemphasised growth as an essential means to ensure long-term shareholder wealth. Top management ofthese companies had found that the ROI as a divisional performance measure lowered the interest ofsuccessful divisions to invest. As a development manager of a divisional adopter (Company B) explains:EVA was adopted because it is good for business and aims for growth. ROI could have preventedacquisitions. EVA shows the acquisitions that create value. A similar comment was provided by thecorporate CFO of a divisionalised organisation (Company F) regarding all types of investments: Growtheasily stopped on high ROCE as division heads did not want to ruin it. This (VBM) helped growth,stimulated growth and investments. In four other organisations adopting VBM, the focus and motive foradopting EVATM, was on the efficient use of assets. In terms of capital investments and working-capitalmanagement, VBM was expected to direct more attention to the more efficient use of capital. Increased

3 In the recent study by Huolman et al. (1999), shareholder value was found to be emphasised in 59% of the company annualreports issued by the top 50 companies in 1999. The comparable figure was 37% in 1995 and 15% in 1990. This emphasis onshareholders is natural in our case companies, since they were selected based on their annual reports.


foreign competition was regarded as forcing some of the interviewed organisations to improve theirefficiency.

Our findings indicate that shareholder value is emphasised in all our VBM companies. Given the resultsof the PA Consulting survey, this is not surprising. It also seems that VBM in practice is used to supporttwo fairly different strategic orientations at the group level, while strategising is not delegated to thedivision level or to any other lower level of the organisation.

4.1.2. Performance measurementThe success of a strategy can be measured in various ways. In three of the adopting companies, EVATM

was calculated at a group and divisional level, but not at the level of business units. In these companies, theadoption of VBM had no impact on measurements at the business unit or lower levels. One explanationfor not calculating EVATM at the business-unit level was, according to the CFO of Company D, that themost important driver of EVA is operating profit. In one divisional level adopter, Company C, EVATMwas calculated only for the division as a whole, though it was claimed that, lower levels are measuredon the drivers of EVA. This divisional level EVATM adopter had implemented EVATM and BalancedScorecard, and planned to use both financial and non-financial indicators to follow up the success ofthis strategy. The interviewed CFO regarded the use of EVATM at lower levels of the organisation asproblematic, but also saw that the VBM is of little worth unless linked to operations through a BalancedScorecard. Shareholders do not have any relevance unless value creation and destruction is linked toBSC. WACC is not very interesting. Somebody has to take care of it, but it is definitely not an issue that thefront line should spend time with. That is the duty of group finance. . . . Middle-management has to adoptwhat matters. Two adopters also defined EVATM for business units. Hence, it appears that the adoptionof VBM has, in some organisations, had an impact on measurement at almost all levels; whereas, in otherorganisations metrics only at the highest levels of hierarchy have been altered.

In addition to EVATM, return on investment, net sales, net profit, cash flow and gearing were amongthe indicators followed by VBM adopters. In other words, the adoption of EVATM does not seem to leadto a single measure of success or the abandonment of other measures. There were differences, however,among the adopters in the use of non-financial measures regarding group control over divisions. In someorganisations, the measurement for divisions is purely based on financial measures; whereas, in others,assessment includes non-financial measures as well.

Although there appears to be a single objective of shareholder value creation in VBM companies, it isin practice adopted differently at different organisational levels and measured in various ways. Therefore,VBM does not seem to solve the problem of using different financial measures. Neither does it lead to onecommon language throughout the organisation, nor to decentralisation or empowerment of local businessunit managers, as has been suggested by EVATM proponents (Stern, 1994).

4.1.3. Target settingSimilar to measurement, target setting also takes various forms among VBM adopters. Traditionally,

many organisations set targets as part of the budgeting process. One of the interviewed divisional leveladopters (Company C) stated that they moved to rolling budgeting concurrently with the adoption of VBM.Before adopting VBM, they had budgeted earnings and balance sheet, and target ROCE, on a yearly basis.Performance was compared with the budgets. Now, the company derives targets from long-range plans.Targets are set for cash flows, accounts receivables and accounts payables, inventory levels as well asother leading indicators, presented in the form of BSC, in addition to an earnings statement and balance


sheet. EVATM is calculated only for the company as a whole; targets for business units are set as describedabove. Budgets and targets for measures are updated every 4 months, and performance is evaluated againstthese targets. Hence, together with VBM, rolling budgeting and BSC, both how and how often the targetsare defined have changed in this company.

In one group-level adopter (Company A), no major changes occurred in yearly budgeting. The managingdirector derives targets for units based on group EVATM targets. The units make budgets using a bottom-upmethod, with the target of deriving the maximum EVATM. If budgets do not meet expected targets, budgetsare re-formulated within the units. Once budgets have been prepared and agreed upon, the units areevaluated against the budgets and budgeted EVATM. This is not a calculated EVATM based on the currentlevel EVATM, rather the level is set during the budgeting process, resulting in either a positive or negativeEVATM change. Hence, in this company, EVATM appears to represent a major variable to which targetsare tied. The frequency of target setting has remained on a yearly basis.

Another group-level adopter (Company D) sets targets for divisions based on EVATM, other financialmetrics and some non-financial metrics. At the business-unit level, operating profit is considered to be aprime driver of EVATM. Therefore, targets at the business-unit level are tied to operating profit, as wellas to other financial and non-financial measures. In this company, target setting is done on a yearly basis,but remains separate from the budgeting process. In fact, the company does not budget at the corporatelevel. Hence, the target setting in this company is accomplished on a yearly basis, independent of thebudgeting cycle. Targets are set for both financial and non-financial metrics, instead of relying on onlyEVATM, though EVATM is used only for setting targets at the divisional level.

In yet another group-level adopter (Company F), the CFO commented, targets were flexible accordingto this [earlier success of division], and we should have been better in budgeting. This suggests thatEVATM adoption in this organisation has had little effect on the objectivity of target setting. Targets fordivisions and units were set in terms of ROCE. As they explained it: There is a common target of acertain ROCE %, and we have relied on divisions seeking to achieve that. They tried to focus on EVATM,but as the financial success of the company was not strong at that time, operating net earnings was usedas a surrogate. Moreover, they admitted that when business is not going well, absolute figures such asearnings before interest tend to draw attention. Hence, the introduction of VBM did not lead to anyactual changes in how targets were set or how performance was measured in practice.

In sum, the implications of VBM for target setting have taken various forms. In some of the adoptingorganisations, targets are set mainly on an EVATM basis; in others, based on EVATM in combinationwith other financial measures; yet in others, based on both financial and non-financial measures (whenconsidering those organisational levels in which EVATM is claimed to be in use). It is interesting that thereare companies claiming to use VBM, though target setting is actually based on other metrics. Moreover,in some organisations, target setting appears to be tied to the yearly budgeting process; whereas, in othersit either occurs more often than once a year, or is independent of the budgeting process. Nevertheless,targets were negotiated in all the organisations examined in this study. Therefore, EVATM has not led inpractice to a more objective target setting than that provided by any other financial measure. Indeed, aninheritance effect seems to remain very influential in the target setting process (see Mouritsen, 1998).

4.1.4. Incentives and reward structuresIn all the studied organisations, short-term compensation plans were in use, and short-term bonuses

were based solely on financial figures, such as turnover, total gross margin, ROCE, EPS, EBIT or EVATM.For the top management, the group-level profitability figure was a key component. At the divisional level,


divisional level profitability was emphasised, though part of the compensation was typically based ongroup-level achievements as well. The emphasis on financial figures was the case even at the divisionallevel, although Balanced Scorecard had already been adopted. Only in one divisional level organisationwere there far reaching plans to adopt Balanced Scorecard as the basis for compensations, though nonehad actually adopted non-financial measures for this purpose. In addition to financial targets, there werespecial personal projects or development targets, which could bring additional rewards if they were foundto be successfully managed.

Only in three studied organisations, two at the group and one at the divisional level, were bonuses actu-ally tied to EVATM. In all three organisations, EVATM was not specified as the only basis for rewards. Asthe Development Manager of a divisional adopter explained it: EVA contributes 40% of the bonus, 20% ofthat is based on achieving group targets, 20% on unit targets. In addition, 20% is based on unit EBIT, withqualitative personal targets forming the rest. In all three organisations, the target levels were set during thebudgeting process. Maximum bonuses were restricted. The maximum varied between 2 and 7 months ofsalary, and did not conform with the unlimited maximum suggested by Stern and Stewart. In addition, theproportional size of this variable component decreased at the lower level of organisations, and only a smallproportion of the bonuses was paid based on EVATM, varying between 20 and 40% of the total bonuses.

Financial bonuses are paid annually in all case companies. In one divisional adopter (Company C),where rolling budgeting had already been introduced, bonuses were to be paid in 4-month periods in thefuture, based on financial and non-financial performance during the previous 12 months. Such a procedureis assumed to improve both the accuracy of the target level and the motivation of the management, resultingin a control system more sensitive to environmental and internal changes.

No bonus bank system was adopted in any of our case companies. Neither was such a banking systemplanned for the future. Instead of bonus plans, BSC-based bonuses were carefully considered to avoidshort-termism in those bonuses paid solely on the basis of financial performance.

All the interviewed companies have implemented stock option plans, and several plans had alreadybeen issued by all except one of the companies. The interviews revealed that stock option plans havebeen issued due to requirements set by investors and analysts as well as the interest in options expressedby management. At the same time, they admitted that stock options have not motivated management oremployees to work harder. Especially in the case of out-of-money stock options, the motivating factorwas reported to be even negative. Four of our study companies have issued stock options only to topmanagement. The dilution of these companies varied between 4 and 6%. For the two study companiesthat issued options to employees, dilution was 18.7 and 22.6%. In all except one stock option plan, thestrike price was fixed, and in one plan it was increasing very moderately. In addition, most of these planshad a fixed vesting period. None of the interviews revealed any problems related to the dilution effect.

In sum, the reward structures of VBM companies were divergent and did not solely emphasise EVATMtype measures. These measures were used for rewards only to personnel at higher organisational levels.In addition, other financial measures played an important role in the reward structure. Furthermore,there were strict upper limits in the rewards, and no banking system was present in our case companies.Therefore, the adoption of VBM did not appear to simulate the pay-off of shareholders in our casecompanies, and thus did not necessarily lead to any improved alignment of shareholders and managers.Stock option plans have been used in our VBM companies as suggested in the normative literature, thoughthe strike price does not conform with suggested practice, and some companies have issued options toall employees. In addition, our interviewees hold the view that stock option plans do little to motivatemanagers to work harder.


4.2. VBM and decision making

Although the management control implications were rather different from those proposed by the con-sultancy literature, we attempted to study behavioural changes as a consequence of VBM adoption.

4.2.1. VBM and strategic decisionscapital investments, acquisitions and divestmentsShareholder value was frequently emphasised in the strategic capital investments, acquisitions and

divestments of the case companies. As one former CFO, currently working as the Vice President ofCorporate Development at Company B operating in a mature business, explains: One of the mainquestions is what to do to increase share price. . . . We bought X Ltd from the Netherlands, and it has beenone clear initiative to increase share price. . . . We are forced to consider the impact of acquisitions onvalue. We assess, with the help of investment banks, how markets would regard a planned acquisition.Similarly, another corporate CFO (Company D) responded to our question of whether they have boughtcompanies with negative expected EVATM: we have calculated that it is not sensible to bid more (foran acquisition target), and lost the battle (over those companies). Hence, for the strategic evaluationof various businesses, shareholder value (SHV) and VBM seem to offer a useful measure for someorganisations in estimating both the current and future profitability of each business. Although VBMcould be useful in making strategic decisions, the introduction of VBM does not necessarily lead tochanges. The CFO of Company F told that: we should have divested some businesses, but we nevercould make it. He explained that the owners, who had also other stakes as producers and customers inthe company, were interested in looking after their own total interest. In such a case, VBM tools indicatedactions that the owners did not perceive to be of value to them.

One of the major strategies of the studied organisations was to focus on a core business. It is difficultto judge whether VBM has had a significant role in forming such a strategy. We assume this to bemore a general trend in business than an outcome of VBM. Nevertheless, VBM may facilitate suchtransformations. One example of such use is found in a formerly multidivisional organisation usingEVATM. The corporate controller of Company A described the process of focusing on core business:We saw from the EVA of division Y that margins were getting tight. Investments did not bring what theywere expected to bring. Similar developments occurred in another major division. If you want to be a topplayer in global terms, the resources required are huge. In our current core business, we were numberone in narrow niche markets, and today we are that even more clearly.

An interesting feature in the re-structuring of some of these companies was that cash cow businesseswere not necessary sold. Instead, the survival of these businesses was guaranteed to ensure cash forgrowth businesses. The major selection was among growth businesses, where to invest and where todivest. For example, in one divisionalised organisation (Company F) claiming to use VBM, two divi-sions became explicitly cash cow businesses. In these divisions, emphasis was placed on capital in-vestments increasing efficiency and thus . . . neither growth investments nor acquisitions were allowed,though they made profit for others. Their duty was to generate cash flow. One may, however, ques-tion whether this type of reliance on internal funding of growth businesses is in line with shareholdersinterests.

Is there room for strategic decision making in VBM companies beyond the VBM? In several of ourVBM companies, it appears that there exist investments that would not appear profitable by any measure.This is true even in organisations that seem to use VBM fairly comprehensively. Acquisitions that lookunprofitable were made to maintain market share. Investments required by customers were made to


maintain quality standards of customers business. Therefore, VBM seems to direct investments towardsmore profitable purposes, but it does not overrule strategic judgement.

4.2.2. VBM and operational decisionsAt the operational level, shareholder value seems to emphasise the efficiency of capital employed. As

the corporate CFO of a divisionalised organisation (Company A) explained, the company benefited fromadopting VBM: It focused attention on the impact of the balance sheet on profitability. Especially indivision X, there were marketing oriented product managers who were willing to create a nice new brand,and to invest in it handsomely. They saw only increased sales. For such a problem, the EVA shed light onthe whole organisation. It appears that in this organisation, EVATM was effective in reducing what wasreferred to as CAPEX (capital expenditure) hunger. Similar comments were also expressed in othercompanies adopting VBM. At least one of the main arguments used by Company A for subsequentlyabandoning EVATM was to promote growth. As sales were decreasing in one large division, and companywas loosing market share, managers argued that EVATM focused too much on assets, whereas they shouldinstead be focusing on sales and markets.

For evaluating operational capital investments, various standard methods were found to be used, suchas payback, NPV, IRR and DCF. Most organisations use more than one of these methods to evaluatetheir investment opportunities, including payback. Hence, at least for investment decisions, adoption ofVBM/EVATM does not lead to the use of one single measure.

In addition to capital investments, we found some evidence that the adoption of VBM/EVATM has ledto a more careful consideration of working capital. A statement by the corporate CFO of a divisionalisedorganisation (Company D) illustrates this: They (sales persons) remember to think about how to get themoney back home from the customers even while making a deal. In one of the adopting organisations(Company C), the introduction of VBM was said to have led to a re-calculation of customer profitability.More accurate assessment of storing costs, including the cost of capital, and terms of payment wereseen to define the economic profitability of customers. They created an ABC model to provide moreaccurate product and customer costs. Similar economic profit assessments had already been done for itssuppliers. In a sense their method captures single period EVATM for the customer, but not the long-termpotential of that customer.

To sum, it appears that in four of the six adopters, VBM has had an impact on strategic evaluationsand decisions (Appendix A). These four organisations include both group and division level adopters.VBM has changed the ways in which acquisitions and divestments of units and divisions are anal-ysed, and how investment funds are allocated among divisions. However, the adoption of VBM/EVATMdoes not necessarily imply that strategic judgement has disappeared when making strategic invest-ment decisions. With regard to the making of operational decisions, it appears that VBM companieshave lower hunger for capital investments and become more concerned with the cost of workingcapital.

4.2.3. SummaryOur empirical evidence suggests that the use of VBM does not lead to management control mechanisms,

in their purest form, as suggested by the normative literature. Table 2 summarises our findings. Ourevidence shows the weaknesses of distinguishing VBM companies from other companies solely on thebasis of either annual reports or information indicating VBM use in forming compensation plans. On theother hand, our findings suggest that VBM adoption has had an influence on decision making both at the


Table 2Summary of VBM practices in management control and decision making

Dimension of VBM use VBM practice

Management controlObjectives and strategy Maximisation of shareholder wealth. Both growth and efficiency strategies. Mainly used

at the group levelPerformance measurement EVATM metrics or its value drivers used at different organisational levels. Such measures

are not the only ones throughout the organisation. Old measures are retainedTarget setting Mainly negotiated, frequently other measures are used. Zero-EVATM does not have any

major relevanceCompensation Bonuses paid based upon several financial metrics. EVATM has a minor role. No banking

is present. Stock options mainly for the top management at a fixed price

Influence on decision makingStrategic decisions Still room for strategic judgement beyond VBM. Impact on acquisitions, strategic capital

investments and divestmentsOperational decisions Increased emphasise on balance sheet. Leads to lower hunger for capital investments and

more concern about the cost of working capital

strategic and operational levels in at least some organisations. Therefore, it is reasonable to argue thatVBM adoption may contribute to some changes in company performance.

5. Discussion

5.1. Types of VBM adoptionThe VBM use profiles for six adopters are illustrated in Appendix A together with some background

information. This study shows that VBM has been applied in different ways in different organisations. InCompany F, EVATM had no real influence on strategy, capital investment/divestment decisions, perfor-mance measurement, target setting or compensation. Although they claimed to have changed WACC intheir investment analysis, no examples of it altering the course of action could be presented. Although attimes they used EVATM as a performance measure, they also retained all previously used financial mea-sures. The focus was not on EVATM, but on those measures that were already familiar, and usually moreforgivable. The bonuses were EBIT-based with a 2-month salary cap. Application of VBM at CompanyE appears fairly similar to that of Company F, even though Company E claimed that the allocation ofinvestment funds between divisions had changed. The change was basically achieved by changing thecapital charge in evaluating the profitability of divisions and proposed projects. In both organisations,the claimed changes occurred at the group level, with no changes occurring at lower levels of the organ-isational hierarchy. Our interpretation is that in these two organisations, the adoption of VBM has beenmore or less rhetorical, or represents an expression of good will in their annual report.

In the remaining four organisations, the adoption of VBM has had an impact on both control anddecision making. In Company D, the EVATM was adopted at the upper levels of hierarchy. The adoptionof EVATM introduced no change in performance measurement or target setting at lower levels. Althoughincentives are partially tied to EVATM, it has only been done at the divisional level. Moreover, divisionalincentive schemes include a number of other elements in addition to EVATM. The justification for notapplying EVATM at the business-unit level was that the prime driver of EVATM at that level is unit profit.


Given that unit profitability is a prime driver of EVATM, we may still question the impact EVATM has hadon business-unit operations, as the rules of performance measurement and target setting were not alteredin any way during adoption. Hence, it seems that Company D represents a case of EVATM adoption wherethe highest levels of the organisation are influenced, while only limited impact is seen on the organisationas a whole.

Three of the analysed companies A, B and C, can be regarded as fairly comprehensive users of VBM.There were some signs of its use in the decision making within all three organisations. In Companies Aand B, EVATM was defined at the business-unit level and was included in strategic considerations, as wellas in operational decision making, reducing capital investment hunger and improving working-capitalmanagement. In addition, VBM comprises an important component of the performance measurement forreward structures. Company C calculated EVATM only for the division as a whole. At lower levels ofthe organisation, performance measurement and target setting was based on drivers of EVATM. In thatorganisation, the adoption of VBM was tied to a major reform of management systems, including changesin budgeting, ABC implementation and the adoption of BSC. In Company C, the change in the controlsystem occurred at all levels of organisation. The EVATM may also effect lower levels of organisation, butthis depends on how well the value drivers are identified, and whether the incentives are tied to appropriatedrivers, either financial or non-financial in nature. Although no incentives were directly tied to EVATM,Company C is regarded here as a comprehensive user due to the change in control system at lower levelsof the organisation, emphasising the drivers of EVATM.

To sum, adoption of EVATM does not seem to be manifested similarly in all organisations. It could beadopted either at a higher level of organisation or at all levels. It appears that it is implemented as anadditional part of the control system, to complement the existing system instead of replacing it. Even theadoption of EVATM as a basis for rewards appears to have limited implications since it seems, in practice,to play only a minor role in the reward structures, quite different from proposals by EVATM proponents.Hence, the adoption may take various forms, with organisational depth being one key element to focuson, in addition to the content of use.

In this study, three basic VBM adoption types were found: rhetorical use, group-level use and organisa-tion-wide use. Group-level use and organisation-wide use refer to similar content of use, the differencebeing in the organisational depth of use. Further classification could be based on comprehensiveness ofuse. None of the studied organisations used solely economic profit metrics for performance evaluation,target setting and/or compensation. Many suggestions on compensation schemes found in the literaturewere totally ignored in these organisations. Hence, further studies should demonstrate whether there areorganisations that comprehensively follow the advice in the VBM literature. If not, the obvious questionwould be why this would be so.

5.2. On explaining the variety of VBM practices

Given our research aim and the material we collected from the field, we are not in a position toobjectively explain why these practices are so different. We will, however, provide some preliminarythoughts on this issue to aid further research on the topic.

If motives for adoption are different, we may assume different applications as well. In our case organi-sations, the major outside pressures to adopt VBM varied. Intensified international competition was men-tioned as one main reason by three of the studied companies (C, E and F). All three had previously operatedin protected markets, where liberalisation was an ongoing process. Two of these companies were rhetorical


users of VBM, and one company used VBM at only the group level. Increased pressure from the financialmarkets was provided as another reason for VBM adoption in two of our case companies (B and D). In thesecompanies, financial analysts created pressures on company management to adopt shareholder value basedcontrol systems. Company D adopted VBM at the group level, while Company B adopted it at the divisionlevel as well. In Company A, we could not detect any contextual reason for VBM adoption based on theinterviews. Hence, although contextual reasons for adopting VBM varied, based on this study, we are notable to detect any systematic impact of these reasons on determining the type of adoption. Further studiesshould attempt to study the impact of various institutional changes on the type of adoption implemented.

All studied organisations claimed they wanted to encourage certain behaviour by adopting VBM. Intwo organisations, the resulting actions remained rather limited, however. This may be explained by themotives for adoption being other than those stated. It may be that some organisations want to signalshareholder sympathy, or state of the art of management, without changing much of the actual decisionmaking and control practices (see e.g. Abrahamson, 1991; DiMaggio and Powell, 1983). Even if themotive is to influence the organisation rather than signalling, there may be different motives for adoptiondepending on factors, such as the job responsibilities of VBM proponents. A person working in a divisionalstrategic planning department with responsibility for acquisitions may have a different approach to VBMthan a group controller concerned with divisions not looking for healthy growth. Hence, various internalmotives for adopting VBM may well explain some of the observed differences in practice, and furtherstudies could focus on the impact that various motives for adoption could have on actual practices.

The question of differences in practices is even more interesting if the motives were similar. It maybe that some organisations actually tried to change decision making and control practices, but failed forsome reason. The reasons for failures in management accounting implementation have been a topic ofmuch debate in recent years (see e.g. Argyris, 1990; Cobb et al., 1995; Kasurinen, 2002; Malmi, 1997;Markus and Pfeffer, 1983; Scapens and Roberts, 1993). One explanation in the VBM context may befound in organisational power and politics. In the case of Company A, VBM was strongly supported by astrong CEO. In contrast, in case D, the idea arose from the CFO, and most other managers were not veryappreciative of VBM. Hence, the power of the VBM champion may determine how it is adopted. It alsoappears that the organisational depth of VBM application was closely related to divisional autonomy. Inthree group-level adopters, the divisions were fairly autonomous, and hence the group management didnot interfere in how divisions manage their business units. Moreover, strong divisions were reluctant tochange the rules of the game, as traditional measures were often more forgiving. This suggests a paradoxin VBM adoption: VBM is thought to be good for steering fairly independent units, but since these unitsare independent, it may be difficult to gain acceptance for its implementation.

It was also interesting that both organisations in which VBM appeared to have no real impact oncompany operations came from formerly regulated markets. One of the rhetorical users had owners thatwere also providers of raw materials to that company. In such an environment, it is not necessarily clearwhat are the prime interests of the various shareholders. A history of regulated markets or vested interestsof various shareholders may suggest that corporate cultures in those organisations are not necessarilyfavourable to practices that may give preference to one stakeholder group over the others. Further researchcould provide a more comprehensive understanding of why VBMs fail, or identify whether there arecontingent factors that might explain differences in such practices.

Finally, we may ask why none of the studied organisations adopted VBM as comprehensively assuggested in the literature. Burns and Scapens (2000) have argued that management accounting systemsare slow to change. It may be that when new practices are adopted, the old ones are maintained as well.


In the organisations studied here, old performance measures were maintained and VBM ideas were onlypartially applied in compensation schemes. Usually, old measures and compensation practices are fairlywell understood. This reluctance to throw out traditional measures and compensation practices used foryears could reflect healthy risk aversion. Further research may focus on risk management perspective inadopting certain features of VBM.

5.3. On the study of performance implications of VBM

One could assume that the benefits, and problems, of using VBM are not identical for different types ofuses. Hence, to study whether companies that have adopted VBM outperform organisations that have notis bound to be problematic unless differences in applications can be accounted for. In such studies, highperformance has been shown to be related to the use of EVATM or other residual income-based measuresas the basis for incentive compensation (Wallace, 1997). Our observations suggest that this interpretationmay be somewhat more complex than originally envisioned. In one organisation, the compensation wastied to EVATM, but only at high levels of hierarchy. At lower levels, no changes in management controlpractices were instituted due to the adoption of VBM. It is questionable whether such changes would trulyhave an impact on organisational behaviour, and thus profitability. On the other hand, we observed anorganisation where incentives were not tied to EVATM, but to its value drivers. Our interpretation was thatin this case the value drivers were thoroughly analysed and understood. Hence, in order to have an impacton organisational behaviour and profits, EVATM itself need not necessarily provide a basis for incentivesas long as its value drivers do. A further observation complicating the study of VBM use as a basisfor compensation, as well as the resulting benefits from adopting VBM, was that in most organisations,EVATM or related measures formed only a small proportion of the total bonus base. Although incentivesmay be tied to EVATM, this may have no practical relevance unless the proportion is sufficiently large.Therefore, our study suggests that the use of VBM/EVATM as a base for compensation does not necessarilymean that VBM is applied prudently, or that it has any influence on the financial performance of a firm.

5.4. On the concept of VBM

Companies seem to assume that it is possible to select certain specific features of a managementphilosophy/tool, while leaving other features aside. Such behaviour is not only limited to VBM/EVATMstudied here.4 Furthermore given the rhetorical use found in this study, we could argue that VBM seemsto be more of an institutional requirement than a functional entity. For research, this poses an interestingand important problem in defining concepts. For example, when would it be justified to say that acompany is applying VBM or EVATM, and when would it not, despite claims by the company thatsuch practices have been implemented? It makes little sense to study the benefits or failures of certainmanagement technologies if organisations do not even apply their core ideas. Should we assume benefits,a priori, for rhetorical use, group level use or organisation-wide use? Should we assume benefits fromorganisation-wide use if all previously existing systems and measures still remain intact, or if rewards areonly partially tied to EVATM? These types of questions seem to have received little attention in currentmanagement accounting research.

4 See e.g. Gosselin (1997) for some of the diversity in ABC use, and Ax and Bjornenak (2000) and Malmi (2001) for diversityin BSC use.


Ittner and Larcker (2001), building on normative literature, defined VBM to consist of six basic steps(see above). Their framework, like all management frameworks, includes elements similar to those in manyother management frameworks, as well as elements that distinguish it from other management approaches.Compared to the generic performance management framework presented by Otley (1999), three out ofthe six steps seem to differentiate VBM from other management techniques. The first step suggests thatinternal objectives should aim for shareholder value enhancement, and the third step invokes identifyingvalue drivers. The fourth step urges the firm to develop action plans, select performance measures andset targets based on value driver analysis.

However, as suggested in the normative literature, rewards form an essential element of VBM. Rewardsare also included in the performance management framework by Otley (1999) and have been used inthe earlier research to differentiate EVATM adopters from non-adopters. Therefore, rewards should beexplicitly included in the concept of VBM.

Moreover, the six steps do not sufficiently account for decision making. Decision making should, at alllevels, follow a certain logic in the organisations using VBM. The key elements of VBM, differentiatingit from other management approaches, would then be to:

1. aim to create shareholder value;2. identify the value drivers;3. connect performance measurement, target setting and rewards to value creation or value drivers;4. connect decision making and action planning, both strategic and operational, to value creation or value

drivers.

As suggested by this study, we should hardly expect all these features to appear in organisationsclaiming to use VBM. A minimum requirement could be that the organisation aims for shareholder valuecreation and that either (1) decisions are taken at some levels of an organisation using EVATM or VBMor (2) the management control system (performance measurement, target setting and rewards) is basedon economic profit metrics or value drivers. Such minimum requirements for the definition would allowVBM to serve as a solution to different types of problems in practice. It would not, however, offer muchhelp to researchers wishing to study the performance implications of VBM. The performance implicationsare likely to vary depending on the depth, as well as the comprehensiveness of its use. Therefore, furtherresearch could focus on the types of VBM uses. Instead of comparing all types of VBM/EVATM adoptersto non-adopters, researchers could compare one type of use to another and the benefits and problemsof various uses. Finally, our findings are not particularly good news for those management accountingresearchers wishing to use publicly available databases (cf. Ittner and Larcker, 2001). Such databases donot contain information about differences in use. Hence, the study of VBM use and its benefits is boundto be a laborious exercise, fraught with problems concerning the comparability of research results.

Acknowledgements

The authors wish to thank two anonymous reviewers and the editor for helpful comments. The au-thors appreciate the comments offered by the session participants of the 23rd EAA Annual Congressin Munich (March 2000) and the participants of the Helsinki School of Economics research workshopin 2001. Financial support by Jenny and Antti Wihuri Foundation and HSE Foundation are greatlyappreciated.

252T.M

almi,S.Ikheim

o/Manag

ementAccounting

Research14(2003)235254

Appendix A. Illustration of Value Based Management in six organisationsCase A B C D E FLevel of adoption Group Division Division Group Group GroupYear(s) of adoption 1993 to >1998 1998 1999 19931994 1999 19931994Decision making:

Strategic decisions Focusing on corebusiness;emphasis howeveron strategicjudgement

Acquisitions Strategy formulation,scenarios

Acquisitions Allocation ofinvestment funds

Change in WACC

Operational decisions Indirect effectthroughperformancemeasurement,reduce CAPEXhunger

No change ininvestmentanalysis methods

Customer and suppliereconomicprofitability

Terms ofpayment,operationalinvestments

Change in WACC Change in WACC

Management control:Objectives and

strategiesSVA. efficiency SVA. growth SVA. efficiency SVA. efficiency SVA. efficiency SVA. growth

Organisation levelwhere the adoption ofVBM has changedmeasurements, targetsand rewards

Business unitlevel

Business unitlevel

Business unit level Divisional level Divisional level Divisional level

Performancemeasurement

EVA + otherfinancials

EVA + otherfinancials

EVA + drivers of EVA+ non-financials

EVA + otherfinancials andnon-financials

EVA + threeother financials,all equallyimportant

ROCE main target+ other financials

Target setting Targets inbudgeting processyearly

Targets inbudgeting processyearly

Rolling targets threetimes a year alongsiderolling budgeting

Target setting andincentivesindependent frombudgeting (nobudgeting atgroup level), doneyearly

Targets inbudgeting processyearly

EVA targets wereset in times whenbusinessconditions werefavorable. Targetsin budgetingprocess yearly

Incentives and rewardstied to:

EVA and otherfinancials

EVA and otherfinancials+ personal targets

Financials (drivers ofEVA) and personaltargets, in future alsoto non-financials, asBSC is ready

EVA and otherfinancials

EBIT, EPSconsidered

ROCE + otherfinancials

Note: SVA = Shareholder Value Added.


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275300.

Value Based Management practices-some evidence from the fieldIntroductionValue based management literatureObjectives, performance evaluation and target setting-steps 1, 3 and 4 (Ittner and Larcker, 2001)RewardsDecision makingSelecting strategies and strategic decisions-step 2Action planning and operational decisions-step 4Summary

Research methodResultsVBM and management controlObjectives and strategiesPerformance measurementTarget settingIncentives and reward structures

VBM and decision makingVBM and strategic decisions-capital investments, acquisitions and divestmentsVBM and operational decisionsSummary

DiscussionTypes of VBM adoptionOn explaining the variety of VBM practicesOn the study of performance implications of VBMOn the concept of VBM

AcknowledgementsIllustration of Value Based Management in six organisationsReferences

value based management practices some evidence from the field 2003 management accounting research

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