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ACCA Strategic Professional · Advanced Performance Management · Performance hierarchy

Eskel Plc links senior managers' bonuses solely to annual EVA. The CEO notes that managers are delaying investment in staff training and brand building. Which is the most appropriate explanation and response?

The behaviour reflects short-termism caused by annual EVA, which expenses training and brand spending immediately while benefits arrive later. The board should add long-term measures, capitalise such spend in EVA or defer bonuses into shares so managers share long-term value creation.

  1. AEVA ignores the cost of capital, so a charge should be added
  2. BEVA is encouraging short-termism, so bonuses should include long-term measures or deferred, shares-based elementsCorrect
  3. CEVA is too complex, so switch to revenue growth targets
  4. DManagers are risk-seeking, so remove all performance pay

Explanation

Annual EVA expenses discretionary spending such as training and brand building, which reduces current EVA while benefits come later, encouraging short-termism. Remedies include adjusting EVA to capitalise such spend, multi-year measures and deferred share-based rewards. EVA already includes a capital charge.

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