The lack of controllability of EVA explains its decline a field study

François Larmande and Jean-Pierre Ponssard
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François Larmande: EM - EMLyon Business School

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Abstract: This paper investigates the properties of EVA compensation schemes, which were considered as a major managerial innovation of the 90's. The analysis is carried on in the framework of contract theory and based on a six year longitudinal case study. Such schemes induce highly volatile bonuses compared to more traditional ones. This is interpreted as a loss of controllability, where controllability is defined as the controllability of their performance measured by managers. The role of the target setting, based on external standards, and the absence of renegotiation are of particular significance in explaining this loss. This analysis explains the difficulties encountered in the implementation of these schemes and their relative decline.

Date: 2007
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