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On Further Reflection

Do EVA and other value metrics still offer a good mirror of company performance?


To be sure, some mechanics necessary for improving the benefits of EVA or other value metrics are well known: continual training, lots of communication, enduring CEO support, meticulous accounting, and careful design of compensation terms to provide true incentives. These can help counter the two standard criticisms of economic-profit programs: that they discourage managers from investing in the business, and that they require inordinately complex calculations among business units and divisions that share corporate services or assets.

But a look at why some value-metrics users have chosen to either drop, change, or maintain their programs suggests that results hinge on some less-understood challenges. These include managing the metrics during times of corporate transformation; confronting employee concerns about perceived bonus inequities; and identifying the right “drivers,” the individual performance indicators that become targets for employees’ efforts to boost the company’s shareholder value.

For assembly-line workers at a manufacturing company, drivers might include working-capital ratios and output per employee, while customer satisfaction might fit into the formula for a plant manager, for example. “This is the blocking and tackling that makes economic profit work,” says Roy Johnson, a partner with Vanguard, based in Ridgefield, Connecticut. “If companies don’t do this, they’re not getting at the root causes” of the failure to create shareholder value. (Baldwin, Johnson says, suffered from a failure to maintain its system using techniques Vanguard provided.)


At AT&T, the inability to adjust the program to reflect a drastically changing company seemed at the heart of the problem. The company implemented EVA in 1992 and 1993 with Stern Stewart’s help, and extended an EVA bonus plan to its entire white-collar workforce of more than 100,000 people. But then Ma Bell “struggled to reset EVA targets after Lucent Technologies and NCR were spun off and AT&T Capital was sold” in 1996, according to Stephen F. O’Byrne, president of Shareholder Value Advisors, in Larchmont, New York, and a former Stern Stewart consultant.

Behind 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.


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