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Executives (agents) who are not hired by shareholders (principals) may perform in ways, which do not maximize shareholder wealth. For example, executives may differ from shareholders in their outlook towards risk. Shareholders can spread their investments over many firms and thereby lower the risk from any one investment. Conversely, shareholders may want executives to commit to added risky projects (for higher returns). Executives, on the other hand, cannot diversify their risk because of their close association with the firm. An executive can hold only one job, and is most likely to be risk-averse with respect to that job. The Economic Value Added (EVA)-based compensation system is one of the most accepted variable compensation systems being used in the corporate world. Popularized by Stern, Stewart & Co. during the 1980s, EVA is widely accepted as a measure of corporate performance. By definition, the market value of a company will increase with the sustained increase in EVA. This approach is effectively implemented in all types of organizations including growth companies to turnarounds. This is because the continuous improvement in EVA increases shareholder's wealth (based on solid economic benefit) not only the level of share price (which is more on market sentiment). This paper looks at the implementation process of EVA at Tata Consultancy Services (TCS) by drawing parallels to the Stern Stewart's Four M model that covers the measurement, management, motivation and mindset of managers to establish the link between EVA and executive compensation. Information for the paper was collected from secondary sources, including annual reports and research reports of the company and all publicly available data obtained from Stern Stewart & Co. In order to investigate the experiences of EVA at TCS, some part of the study has been composed after a brief interaction with TCS employees, who are practically working on the EVA platform.
How executives are evaluated and rewarded has become a hot topic in recent years. The details of firms' compensation practices are routinely featured in the business press, and have attracted considerable attention from unions, politicians and investment community. For example, CEO compensation has been criticized for being `unfair and excessive' (The Washington Post, 1999) and `not linked to performance' (Wall Street Journal, 1998).
The academic researchers too have been preoccupied with the top executive compensation issues. Nonetheless, despite several decades of research on the linkage between executive pay and firm performance, there are more questions today than there are answers (Barkema and Gomez-Mejia, 1998). As noted by Gomez-Mejia (1994), in spite of using similar archival data records, the large work on this topic resulted contradictory findings. While quite a few studies found a positive relationship between the executive pay package and firm performance (Lambert and Larcker, 1987), others found that there is no evidence of a pay and performance link (Kerr and Bettis, 1987). Other researchers (Antle and Smith, 1986) have found a mixed relationship depending upon the performance measure used.
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