Wall Street’s contribution to management accounting: The Stern Stewart EVA® Financial Management System

O'Hanlon, John and Peasnell, Ken (1998) Wall Street’s contribution to management accounting: The Stern Stewart EVA® Financial Management System. Management Accounting Research, 9 (4). pp. 421-444. ISSN 1044-5005

Abstract

EVA@is a variant of residual income marketed by Stern Stewart & Co., a New York consulting firm, with the purpose of promoting value-maximizing behaviour in corporate managers. This paper reviews the EVA system in the light of this purpose. First, it outlines the rationale for the use of residual income in ‘value-based manage- ment’, highlighting the potential shortcomings of residual income as a single-period performance indicator. Second, it considers the adjustments to GAAP-based account- ing advocated by Stern Stewart in order to produce a more economically meaningful version of residual income (EVA) which might serve as an effective indicator of single-period performance. Third, it examines the Stern Stewart approach to the setting of EVA benchmarks. Finally, it reviews the logic behind the use of the ‘bonus bank‘ to separate the award of EVA-based bonuses from the payment of such bonuses.