VideoBehind the restructuring and associated problems, though, AT&T was looking at value-based metrics as a "panacea," he says. Company managers "came to EVA with tremendous enthusiasm, but no specific understanding of how EVA was going to help them." And O'Byrne, who co- authored the book EVA and Value Based Management with S. David Young last year, says AT&T also "suffered from a lack of commitment to EVA as the sole basis of their nonstock compensation," thus diluting the power of the model to deliver results. In the face of challenges, AT&T managers "found it easier to take alternative routes, like setting new goals or adopting new measures," he says. Recently, AT&T replaced EVA with various expense-to-revenue ratios, along with EPS, in bonus calculations. (AT&T declined to comment on EVA's discontinuation.)
It was largely a driver-related problem that killed value-based metrics at Baldwin Technology. Upon his arrival, Rutledge found managers puzzled about how the drivers they were using--improvements in inventories, receivables, and cash flow, for example--would work to boost economic profit. "They debated and wondered if they were right" in trying to adjust their behavior to get a certain result, he explains.
And then there was the dwindling-bonus syndrome. From a 1998 peak of $9 million in earnings for its fiscal year ending June 30, Baldwin earnings plunged to $4.8 million in fiscal 2000. At the same time, the economic profit number sharply reduced bonuses, which had been hefty in the first year. "It did give rise to a lot of ill feelings," admits Rutledge, when bonuses collapsed in 1999 and 2000.
Earnings seem to be on the mend, with first-half profits up 40 percent over the same period last year. But any bonuses will be based on a combination of cash flow and EPS, not economic profit. "You really have to tend to it," says Rutledge of the value-metrics program.
Today, Baldwin's finance department calculates cash flow and working capital goals for each unit, and managers understand those conventional numbers more easily, says Rutledge. He describes the new process as "almost like breaking down the [shareholder-value] formula." So far, the feedback is positive. "They love it," he says.
A DIFFERENT ALGEBRA
Embracing value-based metrics fully means taking the time to adjust their inner workings to fit your company's needs. At Briggs & Stratton Corp., the Milwaukee-based small-engine maker, president John Shiely believes that adjustment of the drivers is often necessary to make sure the workers actually have the power--something he calls "decision rights"--to improve economic profit with their actions. What sets good value-metrics operators apart is a company's ability to "match the performance metric and the bonus with the decision rights" of employees, says Shiely.
That isn't always easy. A decade ago, for example, managers at Briggs & Stratton, a longtime EVA user, measured the performance of the company's big, unionized engine plant with EVA. But, eventually, they realized it was wrong for the factory, and started using productivity instead. The reason: Most of the plant's 1,000 workers couldn't affect any decisions relating to capital expenditures.
At the company's nonunion foundry, though, managers found that EVA was so relevant that they could measure it directly, and not even bother with intermediate drivers. Most of the 100 workers there believe they can affect decisions that relate to capital spending, and Briggs & Stratton has found that it can train them to understand just how that occurs. "The algebra is different" in such a small plant, says Shiely. The managers themselves have identified EVA's drivers at the foundry: molding efficiency, uptime, scrap rework, and attendance. Finding the drivers that can visibly help employees measure their performance "is the big issue as you push [EVA] down in the organization."
THINKING LONG TERM
Still, that other question--how to keep managers when their bonuses dry up--is a biggie, too. At Briggs & Stratton, the approach is to try preparing people for how organizational, product, and strategy changes will affect EVA and the resulting compensation, and to hope this information keeps them motivated.
The first challenge started in 1995, Shiely recalls, five years after EVA had become a fixture and the company had captured the easiest gains, chopping out excess capital and improving capital efficiency. Top managers received significant bonuses back then. But the next step to growing EVA was to embark on a strategy to build three small "focus factories." And that led to a problem: According to forecasts, EVA would plunge for two years, wiping out EVA-based incentive pay.
Hardest hit were managers building the product base within those new plants. The investment dollars lavished there burned their EVA and their bonuses. "They knew they'd have to bite the bullet short-term," says Shiely. But he didn't consider changing the reward formula, although he was well aware that managers would not like the new growth strategy. In keeping with the Stern Stewart model, EVA bonus targets are set higher than each previous year's actual results. To help discourage short-term thinking--and eliminate the prospect of a no- bonus year--the model also spreads out bonus payments over several years through a "bonus bank."
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