A Study Of EVA Application For Senior Manager’s Compensation Incentive System In Chinese Listed Companies

As the listed companies’ leader, top managers are the most important invested ofenterprise human capital element and the scare resources in present-day society. The designof top managers’ compensations mechanism will play a key effect in strategic developmentof listed companies as well as social development. A good incentive mechanism to topmanagers will reduce agency costs between shareholders and managers, motivate managersto improve management level and create value for the company, on the contrary, a badincentive mechanism will fail to provide motivation, so establish an effective incentivecompensation mechanism for top managers is necessary for the listed company. Incentivemechanisms of compensations have been gradually established, but the relationshipbetween incentive mechanisms and shareholder’ wealth is not settled yet. This thesis hasanalyzed the tradition incentive mechanisms of compensations and studied the applicationof EVA in the compensation incentive mechanisms to top managers of listed companies. Inaddition, the paper used EVA as a measure of business performance to study thecorrelativity between EVA and top managers ‘compensation incentives.EVA has a lot of innovation and advantage, as a new concept which is different fromthe traditional accounting indicators and incentive measures. EVA makes up for the defectthat traditional incentive mechanism emphasis on compensation too much which lacks ofmotivation. The incentive mechanism based on EVA can ensure the top managers to makethe correct decision for the interests of the shareholders and optimize resources collocationfor companies. With the modern enterprise system gradually standardized, the capitalmarket becomes more sophisticated and the reform of the economic system, EVA whichplays an important role in the western enterprise incentive system, is deserved to be learnedby our country enterprise. At present, most companies’ performance evaluation systembased on the traditional performance indicators, but a lot of researches found that thetraditional indicators of performance evaluation have certain limitation. The traditionalperformance evaluation system dose not consider the equity investment, which assents toallow top managers to use shareholders’ capital freely, this will exaggerate the wealth thatthose companies have created. In contrast, as a relatively new concept of value management,EVA can overcome the defects of traditional performance evaluation indicators, whichmore accurately reflects the wealth that companies create for shareholders and measurescompanies’ performance more comprehensively. The incentive mechanism based on EVAcan make the shareholders and top managers of the benefit community. Currently, there aremore than300companies are using the EVA management systems throughout the world,such as Coca-Cola, Siemens, General Electric, DuPont, Sony. There are also a number of companies took the lead in the introduction of the EVA management concepts in China,such as Dongfeng Motor, Baosteel, Tsingtao Brewery, TCL, Huawei.With the continuous development of China’s market economy system and the gradualdeepening of economic reform, I believe that the economic value added will be applied inmore Chinese enterprises. According to the requirements of the SASAC, in order toaccurately reflect the central enterprises’ values, the central enterprises have carried out acomprehensive assessment of the economic value added. Use economic value added tomeasure the results of operations of the central enterprises，will highlight value creation ofcentral enterprises.The study object of this thesis is top managers’ compensations of listed companies.The paper has introduced the new concept of economic value added (EVA) and learned itsapplication in the top managers’ compensation incentive mechanism. Then the thesis putforward empirical analysis, and learned the correlation between the compensation of topmanagers and main factors influencing the decision on top managers’ compensation.