While directors were mollified, Herman Miller still made a concession, issuing employees a one-time, 100-share option grant. Indeed, since then, EVA-based employee bonuses have come back.
NO REWARD FOR ACCURACY
But while economic profit is often designed to insulate executives from a three-year downturn, it may not be able to help them dodge a bigger bullet, as Armstrong Holdings Inc. recently had to do.
The Lancaster, Pennsylvania, floor-and-ceiling materials maker replaced return on assets with Stern Stewart’s EVA program in 1995, and at first scored consistently positive EVA returns, topping its 11 percent cost of capital, until last year. But calculations didn’t include the hundreds of millions of dollars in asbestos-related lawsuit liabilities–a number expected to climb as high as $1.4 billion by 2006- -and a reorganization charge that it capitalized. As the stock quote plunged, management decided to choose new metrics to stem the tide.
Last year, Armstrong added profit to EVA, and this year, it replaced EVA entirely, substituting cash flow. It chose profit and cash flow, says CFO E. Follin Smith, “because we want to reward growth and accuracy and meeting budget commitments, which EVA doesn’t capture.” She says that management’s drive now is “the need to create a meet-the- numbers culture, a meet-your-projections culture.”
Armstrong filed for protection under Chapter 11 of the federal Bankruptcy Code in December. But Smith maintains that the filing had nothing to do with the move away from EVA.
“Different behaviors,” she says, “have to be encouraged at different points in a company’s life.”
Bill Birchard is a contributing editor of CFO, and Alix Nyberg is a staff writer.