Incentives and Investor Expectations

10 Pages Posted: 9 Nov 2006

See all articles by Stephen F. O'Byrne

Stephen F. O'Byrne

Shareholder Value Advisors, Inc.

S. David Young

INSEAD - Accounting and Control Area


This article argues that the Expectations-Based Management (EBM) measure proposed by Copeland and Dolgoff (in the previous article) is essentially the same measure that EVA companies have used for years as the basis for performance evaluation and incentive compensation. After pointing out that the analyst-based measures cited by Copeland and Dolgoff do not provide a basis for a workable compensation plan, the authors present the outline of a widely used expectations-based EVA bonus plan. In so doing, they demonstrate the two key steps in designing such a plan: (1) using a company's "Future Growth Value" - the part of its current market value that cannot be accounted for by its current earnings - to calibrate the series of annual EVA "improvements" expected by the market; and (2) determining the executive's share of those improvements and thus of the company's expected "excess" return.

One of the major objections to the use of EVA, or any single-period measure, as the basis for a performance evaluation and incentive comp plan is its inability to reflect the longer-run consequences of current investment and operating decisions. The authors close by presenting a solution to this "delayed productivity of capital" problem in the form of an internal accounting approach for dealing with acquisitions and other large strategic investments.

Suggested Citation

O'Byrne, Stephen F. and Young, S. David, Incentives and Investor Expectations. Journal of Applied Corporate Finance, Vol. 18, No. 2, pp. 98-105, Spring 2006, Available at SSRN: or

Stephen F. O'Byrne (Contact Author)

Shareholder Value Advisors, Inc. ( email )

1865 Palmer Avenue, Suite 210
Larchmont, NY 10538
United States
914-833-5891 (Phone)
914-833-5892 (Fax)


S. David Young

INSEAD - Accounting and Control Area ( email )

Boulevard de Constance
CEDEP No. 11
F-7705 Fontainebleau Cedex, 77305
(33) (0)1 64 69 43 45 (Phone)
(33) (0)1 60 74 55 00/01 (Fax)

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