Value Based Management practices--some evidence from the field

Value Based Management (VBM), and especially Economic Value Added (EVA(TM)),1 has attracted considerable interest among organisations in recent years. These concepts can be applied to capital budgeting, valuation, management control, and incentive compensation. Despite the growing number of applications, we have only limited independent research-based evidence on how these concepts are actually applied. However, this can be considered not only an essential step in research investigating the benefits of VBM [cf. Ittner, C.D., Larcker, D.F.,1998. Innovations in performance measurement: trends and research implications. Manage. Acc. Res. 10, 205-238], but also on its limitations. With the aid of six Finnish-based organisations from five different industries, we illustrate the diversity of actual use of VBM. Our results indicate that for some organisations VBM is merely rhetoric, while for others it seems to have an impact on both decision making and control system, taking various forms from one firm to another. In some organisations, application of VBM is restricted only to the highest levels of hierarchy, whereas in others it covers the whole organisation. However, in none of the studied organisations is VBM applied in as comprehensive a manner as suggested in the normative literature. This multitude of different ways in which VBM is actually used in practice raises some problems regarding the study of VBM and its benefits. In particular, the adoption of EVA(TM), as measured with EVA(TM) based bonuses [see e.g. Wallace, J.S., 1997. Adopting residual income-based compensation plans: do you get what you pay for? J. Acc. Econ. 24, 275-300; Kleiman, R., 1999. Some evidence on EVA companies. J. Appl. Corp. Finance 12, 80-91], is seriously challenged.