EVA-based bonus system

Does EVA-based bonus system have anything to do with CDC’s 8-month bonus & CapitaLand CEO’s $20m bonus?‏

Three recent events prompted me to seek your confirmation/clarification if there is any link to the bonus system at GLCs/other government-related institutions like PAP-controlled Town Councils/CDCs, etc, and the recently revealed bonuses of the 2 town council/CDC staff and CapitaLand’s CEO:

1. Some PAP-led Town Councils’ revelation of million dollar investment losses in Lehman Minibond and other structured products;

2. Two PAP-led Town Council/CDC staff’s (reportedly senior management?) bonus of some eight months;

3. CapitaLand CEO’s $20 million bonus (refer Straits Times today - attached below)

When I was previously working in a US MNC, the company had a bonus system that was structured quite like the EVA-based system popularly adopted by many US corporations since the 90s. Practices may vary and the exact formula used may be complex but in a nutshell, this system sets aside a pool of money to be distributed as bonus to its staff (senior management) after accounting for “opportunity cost” of capital deployment; the more senior the manager, the bigger the entitlement to the bonus pool - ie weighted entitlement.

Let me illustrate by way of an example:-

If the company makes good profits and after deducting expenses (like salaries etc), has some $1 million available for this EVA bonus pool, this bonus pool will be distributed to those entitled to share this pool (mainly senior management although some companies may include junior management but in any case, their entitlement will be weighted).

Under what circumstances will the staff enjoy good EVA bonuses? These may include:

1. Good profits during good times;

2. EVA benchmark (or opportunity cost) is low - eg if EVA is pegged to banks’ FD or inflation rates during low interest rate/inflation environment, like in recent years in Singapore;

3. Cost reduction exercise like salary cuts, etc (in fact, salary cuts may end up benefiting senior management (the “Generals” in military lingo) at the expense of the rank-and-file (the “foot soldiers”) as these foot soldiers in most cases are not entitled to the EVA bonus pool, assuming the company is profitable with money set aside for the EVA pool).

I am not sure if any (or all) of the GLCs/CDCs/PA etc adopt the EVA-based bonus system, but if they did, could it be the reason why CapitaLand CEO’s bonus amounted to some $20 million and the 2 CDC staff (if confirmed they are senior management) received 8 months of bonus when the rest of the “foot soldiers” suffer salary cuts? (I do note however such an EVA-based bonus system was (still is?) adopted at SFI (a GLC) - link MOM)

Also, if these GLCs etc adopt EVA-based bonus system, then can we safely assume top management (eg CEOs of Temasek, GIC, etc) would have received superb bonuses during the bull run years (and even during the current crisis years as long as there is bonus for the EVA pool for distribution)? But I guess Singaporeans will never get to know how much such bonuses were as these are presumably secrets not for public consumption.

(Note: I note the justification for the PAP town councils investing in “risky” Lehman Minibonds was in order to “beat inflation”, but are there other reasons why these town councils (and other GLCs, etc if any) resort to taking such high risks (but with corresponding high returns)? Is there any link of this need to outperform to the EVA-based system?)

Regards,

Jeffrey Ho

http://forums.delphiforums.com/sunkopitiam/messages?msg=25282.1