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On Further Reflection

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

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.

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