Shareholder Value Advisors is a consulting firm that helps companies improve performance through more effective business unit incentives.
Effective business unit incentives require (1) a well designed measure of business value added, (2) accurate estimates of competitive pay and (3) a plan design that provides strong incentives. Effective business unit incentives can often be expressed as competitive pay plus a fixed percentage of business unit value added (which may be negative).
Current earnings have two weaknesses as a measure of business value added: they can come at the expense of future earnings through short-sighted cuts in advertising or R&D and they can come from investing additional capital that earns less than its opportunity cost. A well designed measure of business unit value added needs to correct both of these weaknesses, incorporating proxies for change in “future growth value” and taking account of the cost of capital.
Accurate estimates of competitive pay require statistical analysis of labor market data that adjusts for differences in responsibility and performance.
Designing a strong incentive requires, first of all, a measure of incentive strength. One useful measure of incentive strength is leverage, which is the percent change in pay or wealth associated with a 1% change in shareholder wealth or another measure of value. We use historical data and Monte Carlo simulation to measure leverage and the correlation of pay and performance (alignment). Our historical analyses provide benchmarks and show the impact of management pay leverage on company performance. Incentives will have high leverage and alignment when the management team’s share of value added is fixed across time and symmetric (i.e., there is equal sharing in gains and losses without caps or floors).
OUR CLIENTS
Recent clients include Genesco, Toyota Financial Services, Sammons Enterprises, compensation lawyer Steven Eckhaus of McDermott, Will & Emery, the consulting firms Hostettler & Company of Zurich, Analysis Group, Booz & Co., Farient Advisors, Chicago Capital Group, and Board Advisory, and the investment fund Relational Investors.
EXAMPLES OF OUR WORK
MEASURING VALUE ADDED
- Excess economic profit improvement (= ∆EP – expected ∆EP) where expected ∆EP is adjusted for changes in R&D, advertising and other factors that affect future growth value (see the article “A Better Way to Measure Operating Performance” on the publications page).
- Funding cost saving (= efficient frontier funding cost – actual funding cost) for the treasury department of a major automotive finance company.
- Exceptional media rights (= media rights – expected media rights) where expected media rights reflects the expected decline in pay TV subscriber growth; for the commissioner of a major college athletic conference.
MEASURING COMPETITIVE PAY
- Statistical models adjusting for responsibility, industry, pay inflation, business risk, performance and company pay policy across a sample of 75,000 top 5 executives (see the article “Six Factors That Explain Executive Pay” on the publications page).
- A statistical model identifying the negative impact of stock ownership on software executive pay levels.
- A statistical model identifying the negative impact of academic ranking on university president pay.
DESIGNING STRONG INCENTIVES
- Economic profit bonus plans providing a bonus equal to a competitive target bonus + a fixed percentage of excess ∆EP (which may be negative),
- Consumer finance treasury department bonus providing a bonus equal to a competitive target bonus + a fixed percentage of funding cost savings.
- A performance share plan that provides perfect pay for performance (see the article “Achieving Pay for Performance” on the publications page.