Senior managers at a very successful home security service company saw a competitor’s top sales managers break away to start their own competing firm. This client was very concerned about the possibility of the same thing happening to them. They were willing to pay to keep their people, but didn’t want to simply throw money at them; they wanted to pay them in a way that increased their senior sales managers’ loyalty to the company.

We worked carefully with our client to understand their company’s business model, the organization required by that model, how the sales managers fit into that organization, and how the organization was evolving around the unique talents of its managers. Our discovery process not only created an efficient means for us to gather the necessary information, but assured our client that our recommended plan accounted for and preserved all the key elements that made them successful.

We developed a hybrid plan that took into account both accounting and equity price results. Despite the dual nature of the plan’s funding and distribution mechanisms, it was simple enough for the managers to understand what would be driving their own individual compensation. And they understood that if they did the right things, their compensation could be very significant.

One year later, a top manager reports about the plan: “One of the best things we ever did at our company. It really changed the mindset of our senior sales managers in thinking about and acting to advance the broader interests of the company.” The company’s performance is as strong as ever, and their senior sales managers have stayed on board. “I think we designed a really good plan that has done, so far, exactly what we wanted: getting everyone in the same boat and thinking like an owner.”

A building materials fabrication and distribution company with operations stretched across North America was interested in a long-term incentive plan (LTIP) for its managers.

We gathered reports, business plans and records of the existing compensation programs. We also conducted interviews with senior managers of each of the company’s divisions. These interviews were helpful in three ways: (1) as a source of information for us about current operating and management practices; (2) as a chance to answer specific questions regarding our approach to compensation a one-on-one setting; and, (3) as a safe place for key managers to air their concerns about implementation. The interviews were individual (by business unit) and confidential (even from the CEO, per his agreement) to assure that we had everything needed to be able to report on the potential benefits of an implementation, as well as any constraints we would have to deal with along the way.

We shared our findings with the entire senior management team in a full-day presentation that included two hours of Q&A. Before the presentation, we were warned that the management team would need up to several weeks to decide whether to go forward and implement the LTIP. That was all right with us since it was winter and most of their operations were in Canada. However, as soon as the discussion was completed and all their questions had been answered, they were ready to vote right then to go ahead with a full implementation.

Three months later they had an LTIP that the managers and owners were very happy with. Three years later, the managers were well-rewarded for the superior achievement encouraged by their incentives.

A major telecommunications firm with four different businesses was looking for a better way to measure the value creation of each of its units. Each unit’s operating income was being tracked, net of a complicated and contentious set of allocated costs. Those results were being rolled up into corporate GAAP earnings.

We undertook what our client saw as an interesting discovery process, systematically seeking the measure that best reflected each unit’s distinct business model. The result of this process was four unique measures which provided a clearer picture of each business’s contribution to overall value creation (only one of the four retained a measure that closely resembled operating income).

In the fast-growing cellular division, for instance, we quickly determined that many of the corporate allocations distorted the marginal value of incremental investments in sales and service improvements. The new measure of net revenue better encouraged value-added acquisition and retention of customers over time. On the other hand, the operating profitability of the equipment supply unit didn’t include charges for the heavy capital investment specific to that division.

Our next step was to relate management activities to financial results at the corporate level. This simplified the evaluation of trade-offs between incremental corporate-level expenses (including investments) and cumulative business unit returns. The result was a clearer link to activities and results at the points where decisions are made, and an overall clearer picture of how and where value was being created.

As the CFO later told us, “The new measures eliminated unproductive arguments about what was important, and channeled those energies into productive discussion about getting better results. Our division managers now see their units as a ‘whole business.’”

An information services firm was considering investing in a new platform technology that would be shared by about a dozen separate business units. This was a major investment that would represent about a quarter of their total capital spending over the next year. In estimating the returns associated with this platform, they looked at each business unit that would utilize it, and the profit each unit would realize from its build-out.

In order for that profit to be meaningful, net additional revenues that could be derived from this new platform would have to be compared to the net additional operating costs required to run and maintain this platform. Those business unit returns would be aggregated and compared to the overall, corporate costs of building the platform in order to determine its return.

This firm soon realized that its existing costing system did not really enable such an analysis. Certain costs built into the profitability estimates were, in fact, allocations that made fixed corporate level costs look like business unit level variable costs. These allocations included corporate overhead that would not go away with the new platform, as well as customer service costs (borne by a separate, outsourced unit) that would significantly decline with the new platform. Some of the costs that were presumably up-front investment costs also appeared as ongoing operating costs because of how this project was being financed, and how those financing costs were reflected in their reporting. It wasn’t until all these costs were sorted in a manner allowing a marginal analysis that the company could reliably estimate the returns of this project.

Their initial analysis implied a net return of about three-to-four percent on this project. More accurate costing information enabled them to see that this platform investment would have an over 20 percent return, not including extra returns that could be wrung out of the project because the financial data now more accurately reflected the impact of alternative platform implementations.

”We need to see if our plans will actually result in value creation,” was how the CEO of a Southern consumer goods company introduced our task.

We began with valuations of their four business units. From these we were able to determine the aggregate growth in profit and rate of reinvestment that would be required to justify those valuations. We then compared those projections to each business units’ long-term plans, which combined projected growth in their current operations with the value of projected M&A activity.

Two of the business units showed more than adequate growth in their plans. These units were then asked to specify resource requirements, risks and contingencies for their major initiatives.

One unit that showed barely adequate growth to justify its value was sent back to develop “stretch” targets. Over the next two years, this unit made two acquisitions and improved operations by investing in its distribution capabilities. This enabled the unit to more than realize the value in its original plan.

The fourth business unit projected inadequate profit growth to justify its valuation, and couldn’t see any path of suitable risk to achieving it. Since the valuation implied that the unit might be worth more if sold than operated, senior management began investigating opportunities for a sale. Later that year, when a competitor made a strong offer, the company was positioned to evaluate and accept it quickly, realizing far more value from that unit than they could have under any operating scenario they had developed, probably also saving many jobs in that unit.

A major telecommunications company called us in with a typical lament. “Our capital spending is out of control. We have tried everything to contain it. We have a sophisticated and rigorous capital budgeting program and internal RFE (request for expenditure) process. We have financially savvy engineers and engineering savvy controllers poring over projects to insure that only the highest ROI requests get through. We have a detailed post-investment review process to make sure we’re getting the results originally promised.” And yet, they continued to show the three key symptoms of capital inefficiency: their business units still had an “insatiable appetite” for capital; top corporate management still had to resolve furious debates over capital allocation; and their overall return on capital remained stubbornly low.

After a detailed review of the company’s business model and financial history, a couple of things became apparent. First, requests for capital came from units without any accountability for capital. Second, the business model, with its many shared services supporting dozens of customer-facing units, made post-investment monitoring a hopeless exercise, like tracking a bucket of ink spilled into a swimming pool.

We redesigned their measures to provide accountability for capital at the level at which capital requests originated and capital was spent (as opposed to the level at which those expenditures were approved). We worked with the business units and corporate finance to insure that capital charges could be incorporated into their reporting system in a manner that was easy to track and administer.

Two years later, the CFO credits the new measures for “dragging their engineers into the process of value creation. And,” he added with a mixture of pride and wonder, ”I haven’t had to reject a single RFE in the past two years.”

An apparel company wanted a consistent, value-based focus to drive its licensed and house brands, outsourced and in-house manufacturing, company-owned stores, and distribution through chains and specialty retailers. The CFO warned us at the outset: ”I’m a believer, but a lot of people here remain to be sold. They each have their particular way of operating, and many of them have been very successful and well-paid with their current system.”

We began the implementation by training a broad group of internal managers on the outlines of a VBM program, with some guidelines on how their various management processes could be modified. This began the ‘transfer of technology’ that would create internal experts who could work with us while making the program their own. Over the next eight months, we worked together to define or modify measures for each business unit, developed decision support models for the company’s most common types of investment, and designed a new incentive plan covering all managers.

Once everyone was satisfied that the new system would encourage and reward managers appropriately, we sought and obtained approval from the company’s executive committee, which had been briefed monthly on the progress. Finally, we went to the board for their approval.

”How will we judge their performance? Will we be paying our people enough? Will we be paying them too much? Will we be paying them for the right things?” We answered these question with simulations of how results and payouts would look under various scenarios over multiple years.

We worked with management on the announcement of the program. Within days of the announcement, the share price jumped nearly 20 percent. The company has continued to outperform its sector peers ever since—and it has been on the program for over five years.

“I don’t want to be the only person around here thinking about the owners,” said one CFO when he introduced his company to us. He was the trusted “outsider” to the family that owned and ran the company. “I want a solid business structure in place for the next generation, and a focused team working for them.”

Most of the managers had been with the company for a very long time. During the implementation, we brought them along step by step, listening to and addressing each of their concerns. The entire implementation process took us across four countries over nine months.

At dinner in an Irish castle, the division president in that country shared his concern that the peculiar conditions of his market meant that a plan as simple and objective as ours would not earn him any bonus next year. We had a choice of complicating the plan to account for his market conditions, or having him trust that over a couple of years, the market peculiarities would get played out, and he would get the reward he earned. By the time we were done, he was satisfied that the multi-year structure of the plan was sound, and he was willing to count on the owner to let the plan work as it was designed, i.e., as a fixed interest in his division’s results over several years.

Since each division manager was a longtime colleague and friend of the owner, they were each given the choice of whether or not to ultimately adopt the compensation element of the program we had prepared for them. Five of the six divisions took on the new plan, including the Irish division.

Eventually, seeing how the plan had worked for the rest of the company, the sixth division adopted the incentive plan as well. And the Irish division manager’s belief in the owner and his team was very well rewarded over the next five years.

A large telecommunications firm had implemented a value management program two years earlier, and now wanted to review how well the program was working for them.

“We got a lot of hay out of the program when we rolled it out two years ago, but I’m not sure we’ve kept our focus since then. Maybe it’s time for some additional training,” their CFO said, indicating a clear readiness to spend significant sums in this area.

Managers were interviewed across all functions and divisions, and at several levels in the organization. Over 40 managers contributed to a clear picture of their company’s current management processes. They provided vivid examples of behavioral and methodological changes over the last two years. They shared where their program had made a difference in their work, and they were candid about the perceived pitfalls of the program. The verdict was generally positive, but experiences were notably uneven across units.

We specifically inquired into the potential benefits of additional training. “We’re very busy with new initiatives,” reported several marketing managers. “We have enough opportunity to learn about EVA (their main measure). Our training center has regular classes on it, which would be useful, except that my boss is still asking me about NOI. So, what’s the point?” It turned out that even though EVA was a basis for funding corporate bonuses, NOI was the basis for distributing bonus dollars among the marketing units. In other words, where bonuses were not felt to be greatly impacted by knowledge of EVA, the motivation to learn about EVA was weak. No amount of spending on training would change that.

Our interviews with network operations managers revealed a very different story. Their bonuses were funded and distributed based on EVA. “EVA dragged our engineers into the process of value creation, said their COO. “This is the first year in our history where our capital spending will not exceed depreciation. We’re working much smarter now, always seeking better ways of using our capital.” Was the measure too complicated? “Hey, we’re tech heads. And that’s where our money is coming from.” In other words, where the bonuses were perceived to be based substantially on EVA, further spending on training was hardly necessary.

After ten weeks of interviews, we presented our findings to their executive committee. The final report described their planning, decision-making, and reporting relative to what their managers had experienced (a) prior to their implementation of VBM, (b) relative to their expectations, and (c) relative to best practices and what our experience suggested was possible. We concluded that significant new spending on training would be wasted without changes in their measurement and incentives.

Their top management thanked us for comprehensive and well-organized findings and actionable recommendations, but they expressed special appreciation for the patience with which we approached their vast organization, and for the great trust we were able to engender from their people, made plain by the candor of our report.

A major financial information service had been managing their company and its divisions under a VBM program they had implemented three years earlier. Although they felt that the program had helped them significantly, they wanted to understand where it was helping them most, and where they were losing out on potential benefits. They were considering strengthening their incentive program, but a peculiar issue had arisen for them in the third year which complicated this wish.

“In our first two years, our stock price went up along with our EP (economic profit). But last year, our EP rose while our stock price dropped. That kind of divergence produces bonuses that are difficult to justify to our Board. Before we can make any other changes to our plan, we need to understand what happened, and make sure we’re doing everything right.”

We interviewed over thirty of their managers across all their divisions and various levels of management. We found that their VBM program was, in fact, creating significant operating and strategic benefits. They had an acquisitive history, and their pace of acquisitions had barely fallen off under VBM. But both corporate and the divisions agreed that capital budgeting and spending was now being conducted with greater discipline and confidence.

At the same time, we analyzed their corporate EP results and stock price performance. We found that EP growth reflected stronger operating profits, but did not account for a recent spike in interest rates. Since their stock was sensitive to interest rates, it had dropped. Our recommendation on this issue, which the client adopted, was to leave their measure alone. Modifying their measure to account for interest rate effects would (a) complicate the measure, and (b) penalize (or reward) managers for a factor that, though it clearly affected stock price, was also clearly out of their control. They agreed that the anomalous results of the prior year could be explained to the board on the rare occasions when it may arise.

With our findings and recommendations in hand, they subsequently modified their incentive plans, with Board approval, and took their operating and their stock price performance to the next level.