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Ranking CEO Wealth Creation: The Methodology

Our ranking is based on the performance of companies in the S&P 500 index (and their CEOs) for the three …

Our ranking is based on the performance of companies in the S&P 500 index (and their CEOs) for the three years ending on June 30, 2016. Only companies for which the CEOs were in their roles for the entire July 2013 through June 2016 period were ranked. Also not ranked are the 22 REITs in the June 30, 2016 S&P 500 Index. (Finally, six companies were not ranked due to incomplete data for the 3-year period.)

Again this year, we are using a methodology recommended by Bennett Stewart, CEO of EVA Dimensions. CEO performance was assessed using four measures based on the concept of Economic Value Added, or EVA. EVA is profit less the full cost of the capital the business uses. This is known as economic profit.

The first and most important measure, EVA Momentum, shows the trend in the growth of the firm’s economic profits (EVA) over the past three years. It is a better measure of wealth-creation progress over time than growth in sales, EBIT, EBITDA, or earnings per share, since it only counts profit growth after covering the full cost of capital, including a minimum shareholder return to compensate for risk.

The second, EVA Margin, shows how profitable the firm is per dollar of sales. It blends pricing power, operating efficiency, and how well assets are managed, into a single net¬-margin score.
The third, Market-Implied EVA Momentum, measures the expected long-run growth rate for economic profit that’s reflected in the company’s stock price. It shows how well the CEO has positioned the company for continued profitable expansion, as far as investors can tell, through initiatives targeting growth markets, innovations, brand value, and operational excellence.

We also use Market Value Added or MVA, to judge wealth creation. MVA is the difference between a firm’s stock-market value and the overall amount of capital it has invested. It’s the shareholder wealth the business has created. MVA Margin, the fourth metric used in our ranking, is MVA as a percentage of sales—the higher this figure is, the better.

All of the measures were computed for each company using June 30, 2016 share prices, and the most recent reported financial data up to, but not after, June 30, 2016. The measures were then ranked within their industry groups to arrive at percentile scores. A company’s final score is a weighted combination of the four percentile scores above. Those ranked at the very top consistently outperform their industry peers across all four measurement categories. They are highly profitable and valuable, show an exceptional rate of profitable growth, and justify continued confidence in their future success.

The top 50 companies in the ranking delivered an average Total Shareholder Return (TSR) of 23.8% percent between July 2013 and June 2016 (the period covered in the reported financials). The bottom 50 companies’ TSR averaged 1.4 percent, while the average for all of the scored S&P 500 companies was 12.2 percent. The top 50’s median TSR was 18.7 percent; the bottom 50’s was 2.1 percent.

Total Shareholder Return Jul. ‘13-
Jun. ‘16
Top 50 Average 23.8%
Median 18.7%
Bottom 50 Average 1.4%
Median 2.1%
All scored S&P 500 Average 12.2%

As the table above shows, the top 50 companies in the wealth-creation ranking far outperformed the bottom 50 companies and the scored S&P 500 between July 2013 and June 2016. Note: Total Shareholder Return = share-price return plus dividend yieldreinvested dividends, expressed as a percent.For more on the ranking method and how companies scored, please visit www.evadimensions.com/CEO, or contact Bennett Stewart at gbstewart@evadimensions.com.

About Bennett Stewart and Drew Morris

Bennett Stewart is founder and CEO of EVA Dimensions. He can be reached at gbstewart@evadimensions.com. Drew Morris is founder and CEO of Great Numbers! He can reached at drew.morris@greatnumbers.com.