NewsWire--AUGUST 27, 1996

TOPIC: Goal of the Firm, Financial Statement Analysis, Agency Costs

SOURCE: "Eli Lilly is Making Shareholders Rich. How? By Linking Pay to EVA," Fortune, September 9, 1996, 173-174.

SYNOPSIS: Economic Value Added, or EVA, has been in use as a performance measurement tool for well over a decade. The article describes the introduction of an EVA based performance system recently implemented at Eli Lilly. Randall Tobias, Lilly's CEO, describes the value of an EVA approach to corporate performance and managerial compensation. He contrasts it with other measures and discusses the rewards and difficulties of implementing such a system throughout a large corporation. Although the article doesn't describe the EVA calculation in any detail, the Industry Practice box on pages 80 and 81 of the text give more insight.

DISCUSSION QUESTIONS:

1. What is the goal of the corporation and why is this the appropriate goal? How does EVA provide relevant information for attainment of this goal?

2. Contrast ROA, ROE, and EVA as performance measures.

3. Why aren't all corporations using EVA to compensate executives? What's the downside?