Key to EVA is determining whether projects beat the cost of capital. Managers are given tools to measure performance right down to the level of individual units. This ensures a clear link between performance and reward. Cadle believes share incentive schemes have a place in remuneration packages but says that they are often done without consideration of the real economic costs. The price at which employees are allowed to purchase a stake in the business should be in line with the value that employees have created in the past and will create in the future.
Employees can end up with more than fair compensation.
A human resources director at one SA merchant bank, who asks that the company not be named, says the bank is scaling back its use of share options. Measurable targets galvanise action and knowing exactly what the cash bonus looks like is a powerful incentive. However, there's a recognition of the waning interest in an equity stake. It's about building commitment for five years and maximising value creation. There is a tendency for companies to shorten the period in which employee options vest.