Topic

[EVA] is the single best measure of a company’s profit margin because it correctly and completely consolidates pricing power, operational efficiency and the quality of asset management into one overall score.

August 25, 2020

Incentives Dictate Behavior: Energy and Oil Compensation Measures Examined

EVA Margin Comparison

Firms that are compensated on production-driven goals average lower EVA Margin levels persistently compared to a cohort of peers.

EVA Margin is calculated by dividing EVA by trailing 4-quarter sales. EVA measures the percentage of sales after all operating expenses, taxes, and capital charges have been paid. It is the single best measure of a company’s profit margin because it correctly and completely consolidates pricing power, operational efficiency and the quality of asset management into one overall score. A higher number indicates higher Performance.

Firms that do not include production-based metrics in compensation plans on average earn an EVA Margin that is 6.6 percent higher than firms that include production metrics in compensation measures.

Firms that are compensated on production driven goals average lower EVA Momentum (Growth) levels persistently vs a cohort of peers.

EVA Momentum is calculated as the trailing 4-quarter EVA minus trailing 4-quarter EVA a year ago, all divided by trailing 4-quarter sales. EVA Momentum indicates the rate of growth in economic profit, scaled to sales. When positive EVA Momentum indicates that a firm is generating new incremental EVA, when negative it indicates a firm is destroying incremental EVA. Remember: more EVA is always better.

Relative TSR

Firms that do not include production-based metrics in compensation plans have averaged higher returns over one-, three- and ten-year timelines when compared to firms that include production metrics in compensation measures.

EVA Background

EVA (Economic Value Added) is an established standard in measuring, analyzing, projecting, and valuing a firm’s underlying economic profit rather than its accounting profit. With coverage of more than 18,000 public companies, this solution enables investors to measure, analyze, and value corporate performance and generate informed investing decisions.

The EVA platform allows investors to parse through thousands of companies globally with comparable accounting adjustments to drive informed investment decision making on a systematic basis.

Bring EVA Into Your Investment Workflow

Through leading research and analytics, EVA gives investors insight into factor performance, themes, and other observations within a company or industry – delivering a simple and transparent model and a measure of true valuation for value and growth investors.

EVA research is quickly becoming the solution of choice for asset managers, mutual fund complexes, multi-strategy, equity-only long/short hedge funds, sovereign wealth funds, and public pension funds. Our dedicated team of experienced professionals can help investors leverage the best practices of EVA to determine the trade-off between the Quality of a firm’s assets and Valuation being ascribed by the market for single names and for full portfolios. This insight helps to drive consistent informed investment decisions.

For more insights on the Oil, Gas & Consumable Fuels sector, check out ISS ESG’s recent industry report.


By:

Anthony Campagna, Global Director Fundamental Research, ISS EVA

Brett Miller, Associate Director, ESG Analytics, ISS

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