Zen

Selected Longs

	Sometimes It Pays To Look In the Mirror Ornate ballrooms have been putting giant mirrors on their walls, it seems, since Versailles. Standing at the podium in one such ballroom, I could admire how the mirrors created the illusion of depth, and effectively doubled the number of nice chandeliers hanging over my audience of mostly corporate middle managers. I had just finished a forty minute talk on how to manage for shareholder value and was ready to take questions. A man with a gray mustache stood up and took a microphone, shaking his head and looking rather disappointed. "You know, I don't get all this fuss about the shareholders. Really, who cares about them? Isn't all this shareholder value BS just about enriching our top brass and those greedy bastards on Wall Street? What about the workers and communities?" My experience told me that hiding corporate waste behind "stakeholder" interests was popular sport, and that "screw the shareholders" is the unspoken code of more than a few managers. My first instinct was to rant about how any subordination of shareholder interests is legally improper, morally indefensible, and financially suicidal. I took another moment to consider a less polemical response. I stared off to the side to avoid the audience while I tried to compose a thought. But the audience was still there, in those giant wall mirrors. And there I saw an answer. I turned to the gentleman with the mustache and said. "You know, you're absolutely right those hounds on Wall Street. I go out drinking with them, and I can assure you that all they care about is seeing the money. But I'll also tell you what scares the heck out of them. That's right, they're frightened. And they'll tell you on their third or fourth margarita about what keeps them awake at night. It's this group so ruthless, so relentlessly avaricious,so impatient, so demanding..." I said shaking my head. "Why, wouldn't you know it? There they are!" I pointed to the left wall. Everyone turned to look and saw themselves in the large mirrors. Soon, they saw themselves laughing. I continued. "Over sixty percent of equity investments in this country are owned by people like you, mostly through pension funds invested on your behalf. If the person managing your retirement money told you that you earned a five percent return last year when the overall market earned 25 percent, how would you react? Hey, no problem, right?" Many in the audience, including the man who asked the question, nodded as if to say "yeah, right."
	What Red Auerbach Thinks of Your Metrics Red Auerbach was a heck of a coach. His Celtics won eleven NBA titles in 13 years. The dominant Chicago Bulls of the '90s would have had to win another five straight championships to match Auerbach's record. Red didn't like metrics. Like all great coaches, Auerbach had a mental framework for what it took to win at his game. The person with the best shot should take the shot. The team should ensure that that person gets the ball. The team should prevent their opponents from getting good shots. Pretty straightforward. Still, most accounts of basketball greats focus on their individual stats--total points, points per game, rebounds, etc. Auerbach didn't lean too hard on that quantitative crutch. He believed that none of those stats spoke to the true value of his players. "There's only one stat I was ever concerned about," says Auerbach. "When this guy's in the game, does the score go up in our favor or go against us? The Boston Celtics never had a league's top scorer. We won seven championships without ever placing one Celtic in the top ten." And this wasn't an accidental result. "No Celtic got rated according to how many points or rebounds or assists or anything else he might have compiled. Each man was assessed according to his contribution toward making us a better team. That's all I cared about. In our system, the guy who sets the good pick was just as important as the guy who made the shot." How does one measure that? Auerbach measured it by watching it. In practices and games, "I saw what I saw," and he recognized and penalized lack of teamwork and "false hustle." Now, imagine his coaching task if, before every game, he went behind a curtain and could only manage his team by receiving stats and the occasional play-by-play? Here, the inherent limitation of metrics becomes quite plain. So, why does someone who sells metrics for a living offer such a limited view of them? Because a business unit is distinguished from a sports team by organizational complexity. Unlike coaches, business managers can't watch the whole game as it's happening. They can take little peeks from behind their curtain to see part of the crowd, a few players on the floor, maybe a ref for a chat. In any case, my clients benefit from maintaining the distinction between the measurement of "key factors" driving value (which is critically important), and the rich reality of decisions, actions, and environmental responses that actually create value. Anyone practicing metric madness to understand the whole story of their business should try coaching a competitive sport while remote from the action. Having said that, one measure does ultimately count. Every organization has a goal that happens to be represented a hard number. In Auerbach's case, it was wins and losses. In business, it's how much money the company actually makes over time, i.e., the value of the firm. Oddly enough, many managers drowning in a sea of metrics often fail to keep that one, ultimate goal in mind. A few key metrics can give you an excellent idea of where to look for competitive advantages or shortcomings, but then you have to look. That's why great managers always supplement customer, employee, and productivity measures with constant visits to their customers, people, and operations. They know the value of a first hand feel for what's driving their business, and usually demand the same from their direct reports. And they keep a close eye on the score. "MBA: Management by Auerbach," by Red Auerbach and Ken Dooley, Collier Books, 1991
	Two Percent of the Truth As a young manager in a very old transportation company, I learned the distinction between a good story and a meaningful explanation, and that one rarely leads to the other. It began when my CEO periodically asked me this question that, on the face of it, made no sense. He would ask what happened in my business that caused my unit's profit to rise, say, two percent last quarter. He was looking for specific business segment data. So I would identify some major pieces of my business whose net growth accounted for the two percent gain, leaving out the single or double digit gains or losses of my other nineteen segments that also contributed to that net two percent growth. It was a meaningless answer passing for analysis, and I knew it, and I suggested as much to my CEO. He smiled and said not to fret. These numbers were for the consumption of reporters and analysts. "They're just looking for a story." Of course, we all endure such "stories" daily from the business media. They pass these stories off as meaningful explanations for a company's results, or their stock price movements or, in the case of outrageous hubris, why the whole market moved a percentage point. But markets are granular. An endless number of offsetting factors can "explain" your typical percent change, which drain the nominal explanation of all meaning. We know they're meaningless because if someone gave us the story facts beforehand, they would have given us very little edge in predicting the outcome those facts were meant to explain, even when the facts seem obvious. I can't tell you how many times I've seen analysts warn of something, like the peril of rising interest rates for a particular stock, only to see interest rates go up--along with the stock price. I'm not suggesting that interest rates weren't relevant to the value of the company in question, only that it was obviously far from the whole story. Consider the extreme case of a company's major plant hit by an aircraft and destroyed by fire. We shouldn't be surprised to see its stock price drop. We would say there was a strong causal link. But what if the stock price goes up, say, four percent? Maybe the plant was well insured and otherwise in dire need of modernization. Or consider a company announcing that it will restate two years worth of financial results because of a change in the way it accounted for several transactions, dinging earnings for those years. Furthermore it will also announce that earnings in a future quarter will be lower due to reduced capital spending. When it's stock price drops, the "earnings" story would seem like a slam dunk. Unless the stock price jumps fourteen percent.* Then the story becomes more complicated--the market already discounted all the bad news, or saw the restatement of earnings as a proactive step toward making their accounting more transparent, or thought that the reduced earnings were more than offset by reduced capital spending. That's the problem with stories--most of them are accurate, none of them are true. Company value is what choas theorists call an emergent phenomenon. It emerges from a complex reality that outsiders can rarely fathom. Talking about results as the product of this or that effect is cheap and easy. A manager accountable for those results must work from a much better model. She can't afford to believe her own stories, or have her judgement replaced by those looking through the lens of their stories. Fortunately, most managers have the training and experience to deal with that little portion of the real world whose complexity is transparent only to them. The best you can do is hold them accountable for results. By the time you read about the results in a release, or an analyst report, or in the paper, when you're getting maybe two percent of what really happened, it's hopefully a positive two percent. * "Hanover Compressor to Restate Results," Wall Street Journal, February 27, 2002
	A Tree Grows In Philly I learned early in my career that you won't see the best neighborhoods riding a locomotive. Late one afternoon, I was at the head of a freight train approaching the commercial outskirts of Philadelphia. We rumbled past old factories with faded names painted on their brick sides, names like Bell Electric and National Biscuit. Then, we passed an abandoned rail yard with old tracks splayed across a giant field strewn with broken glass and rusted machine parts. Unlike our shiny, main-line rails, the yard tracks were rusted and disjointed, a vestigial relic of the post-deregulation rail network of the 1980s. That evening, as our engine glided past this diorama of industrial ruin, I saw something peculiar--a small oak tree standing right between a pair of otherwise intact rails extending into the yard. Seeing an oak in the middle of a track is not like seeing a decrepit railcar that could have been left at anytime. This tree clearly originated in a different era. Judging from its size it looked about my age, starting life with the first major airports and super-highways. It must have grown up in the period when trucks began pulling freight off railroads like rustlers stripping a broken wagon, and when passengers that would have once depended entirely on trains for intercity travel would now sooner jump into their cars or board a plane. I nodded to the engineer and pointed to the tree as we passed it. He smiled and shook his head. He may have witnessed its imperceptible growth with the yard's decline one day at a time over decades, never really noticing what was happening. For me, the vision was as fresh and hopeful as my degrees in engineering and finance. This tree--at once incongruous and inevitable--seemed a symbol of irresistible forces, not unlike the capital markets that were its god-parent. The abandoned track embracing it and the gray buildings up and down the line sporting defunct brands of a by-gone era were all visible evidence of markets shrugging off business systems that no longer provide a decent return. One can blame managers, unions, politicians, globalization, or the cycle of life for the deterioration of those particular factories and the physical and intangible assets that supported them. Whatever the proximate causes, the system disappeared because it finally reached a particular destination--the point where investors said "enough" and began supporting computer, cell phone, and Internet traffic instead. So, nature began to reclaim a stretch of the industrial landscape. Old plants are replaced by new trees.
	The Magic Box One of my clients came up with the notion of a magic value box to get at what it seemed I was aiming at in my pursuit of a better measurement system for his company. "It would be like a box, say in some corner of your office, that indicated the value of everything you decided to do. Like, I'm meeting with Jack in engineering, that's going to be worth $200. Or, I'm going to the bathroom, which would be worth minus $10. Unless, of course, I really needed to go, and my productivity was beginning to suffer." It was a wacky notion, this magic value box, and it had a certain intuitive appeal. But I responded that such a box would really be more of a distraction than a panacea. "Consider what you're asking this box to do," I suggested. "It has to tell you the likely contribution to the value of your whole firm from some individual activity." I suggested that this would be mathematically impossible for things more complicated than turning out the lights when you leave. Major drivers of value, like strategic positioning or operating efficiency, are team efforts that don't lend themselves to being objectively disaggregated to the individual level. So this manager suggested, "then we need a box that gives such a value for team efforts rather than individual efforts." "But that's still like driving using the rear view mirror," I replied. "The box you're describing works, like any measurement system, only when you take some action. But there's limited benefit to measuring, even in real time, the value impact of a particular decision after you've acted. The big benefit comes from understanding which choice from a range of possibilities will generate the greatest value before you act." "So," he continued somewhat less excitedly, "we need a predictive box instead of a reactive box. One capable of modeling the infinite variety of possibilities, and efficiently selecting the one likely to create the most value, and in real time." He looked stumped. "Well, I guess that sounds impossible." I suggested that he, in fact, already has one of those. "I do?" "Yea, your brain." All of my greatest innovations came from work with my clients. They helped me articulate things like the distinction between the tracking versus incentive value of measurement, or the wastefulness of managers being managed. The right measures only gets you part of the way there. They provide results against which one can hold managers accountable. But it's the accountability that gets one's brain into gear and gives the standard of accountability so much power. It's how we minimize the need for managers to be managed. The incentive effect of an objective, value-based standard gets us focused on a particular set of problems in a particular way, compelling us to use our imagination, energy, and courage to solve them. These solutions often involve difficult and complex tradeoffs--the kinds worthy of that "magic box" on our shoulders.
	Do they know something we don't? I admire no publication more than Wall Street Journal. But the WSJ is, after all, a story machine. Here are three Business and Finance headlines from the front page of Tuesday, December 23, 2003. "Ford said the bailout of former parts unit Visteon and other moves will reduce fourth-quarter pre-tax earnings by $2.2 billion. (Article on Page A6)" "Wal-Mart and other retailers reported holiday sales so far at the low end of forecasts, hurt by weather and a security alert. (Article on Page B1)" "The Dow Jones Industrials rose 59.78 to 10338, another 19-month high, aided by positive news from Ford and Wal-Mart. (Article on Page C1)" I suppose one had to read all three sections to figure out what's really going on. It didn't help me, though.

	The Seventh Layer of Regulation A few, high-profile corporate meltdowns have generated innumerable headlines. State attorneys general are arresting celebrity bosses. The SEC, characterized as asleep at the wheel, has promised its easily embarrassed political patrons "bold" reforms to prevent future abuses. We've seen this story repeatedly in our history. It's as if the need for enforcement action reflects a failure of regulation. Bad behavior has always provoked cries that "there ought to be a law," even when legal remedies already exist and another law won't make any difference. The newly created Public Company Accounting Oversight Board creates a seventh layer of accounting oversight for our public corporations. The PCAOB is sandwiched between the SEC and listing exchanges, audit firms, board audit committees, and a couple layers of internal financial control that represents the front line of investor protection. There is no doubt that shareholders need some of these layers to minimize what economists call agency costs. But what additional protection is the investing public getting with this seventh layer that they weren't getting from the other six? Does it help that disclosure of problems by a company through its own investigations opens up multiple investigations from multiple government agencies? Or that such disclosures can now trigger additional liabilities that could, at the discretion of a prosecutor, close a company down? Does it help that corporate executives must now mind their "language, tone, emphasis, and demeanor"* to comply with these regulations? I don't think so. But it makes many people 'feel better' because the solution of layering regulation promises eventual utopia while relying on a slowly evolving common law only promises more (though maybe different) fraud to be prosecuted in the future. The controlling tendency of regulators is toward more and more rules to delineate ever-more minute behaviors into "permissible" versus "prohibited" categories. This view is caricatured by the saying "what is not forbidden is compulsory." We may be approaching that absurd extreme in corporate governance with restrictions like Reg FD and Sarbanes-Oxley which, by turns, restrict disclosure and mandate it. Regulation is expensive. The SEC costs taxpayers nearly a billion dollars per year. But that's loose change compared to the compliance costs borne by corporations, which may add up to tens of billions, a taxing amount approaching the total income taxes owed by U.S. companies. Even accounting for considerable costs that would be freely borne by companies in the absence of regulation (to minimize their overall agancy costs), many respected economists feel that many regulations designed to make our markets work better may actually undermine that objective. Every last consultant I know who implements Sarbanes-Oxley believes that they, not the shareholders, are the beneficiaries of the new law. The problem is that all these costs are far more hidden from the average voter than accounting blow-ups and perp walks. There are many instances in our lore of greed pushing people to do bad things. But those of us intimately familiar with product and capital markets also recognize the powerful constraint that greed places on unethical behavior. What penalty can the SEC impose on Putnam's management that doesn't pale in comparison to the $30 billion asset drain they suffered in the weeks after allegations of improper trading? What, exactly, have the executives responsible for illegal activities at Rite-Aid, Enron, or Tyco gotten away with, even in advance of new sanctions? Who believes that any of their crimes would have been prevented by the new regulations? What good does it do cheated investors to have their corporation pay fines, as regulators recently imposed on Freddie Mac, adding injury to insult? There is no doubt that our corporate governance is much less than perfect. There should be more skepticism, though, about the promises of regulatory intervention. Defending oneself against fraud doesn't require an army of government agents; just one lawyer and a "reasonable man," i.e., a functioning court system based on a common law adapted to modern society. A decent lawyer pursuing Al Dunlap for damages on behalf of hundreds of victimized shareholders would likely yield more than a costly SEC, one that fines him less than one percent of his wealth, none of which reaches the shareholders he ripped off. Everyone knows that all the regulations in the world can't stop someone with larceny in their heart. Everyone. Unfortunately, our system of legal remedies resembles 19th century medical remedies. Politics is trumping science in bringing this system up to the challenges of modern society. It just feels better to leech the patient than to do nothing when we don't really know what else to do. And if five or six leeches don't seem to be making a difference, maybe the seventh will. * Language from SEC enforcement action against Shering-Plough CEO in September 2003.
	E-bay Without Feedback Many people view markets without government regulation as unregulated markets. Fact is, there is no such thing as an unregulated market. An unregulated market would describe, for instance, E-bay without its feedback system. But E-bay has a feedback system. It couldn't survive without one. I learned of the power of E-bay's system long before I made my first transaction by observing the behavior of this girl I knew with questionable morals. I'm not referring to the things that made her fun to date, but to the things that would have made her dangerous to marry. This was a person who, if she thought she overpaid for a pair of shoes, might dispute her charge to the credit card company to get out of it. In this light, her E-bay behavior was a source of amazement. Her normal lackadaisical attitude or propensity to do as little as she could get away with didn't apply to E-bay transactions. She diligently filled her orders, and included everything that was reasonable to provide. She didn't want negative feedback. Negative feedback undermines one's ability to sell more stuff. The remarkable thing, if you have a jaded view of business, is that E-bay's feedback feature was not mandated by any disclosure police. The feedback system exists because it makes E-bay's business profitable, if not possible. But that might not be enough for those who see the threat of crookedness around every corner. Yes, there are two ways to look at E-bay. The pro-market view celebrates the emergence of E-bay as a triumph of human activity in creating the largest new trade zone in recent history. The anti-fraud view is wary of E-bay for giving con artists the largest new venue of recent history in which to operate--it should be regulated. The point isn't that E-bay itself is managing this balance as well as could be hoped. The point is that nobody has any incentive to manage it better, including those third parties who would arrogate to themselves the role of protectors of the public safety. E-bay is a microcosm of our economy. Our markets have many, varied feedback mechanisms that reinforce integrity, honesty, and fairness. That's why brands and reputations are worth so much. That's why relationships matter more than transactions. That's how the human foresight that evolved from the complex problems of prehistoric survival came to be applicable, however imperfectly, to the needs of the Internet Age.
	God's Proxies The Museum of British Columbia in Victoria provides a striking example of how alien civilizations greeted each other when the British first sailed the scenic inlets of the Pacific Northwest. A naval officer of the day recorded an encounter with Native Americans rowing toward them in canoes. A shaman dressed in colorful garb evoking a mythical creature with mask and wings did an elaborate dance. The officer's narrative was accompanied by a tatty, silent film showing the haunting dance (or one similar), down to the tribesmen rhythmically banging the bottom of their canoes with their oars. Who could guess what the tribesmen were thinking? The British couldn't even tell if they were the intended audience, or if the dance was aimed well above their masts. Europeans quickly came to understand how Native Americans invested their gods with awesome powers affecting their everyday environment, personalizing them in colorful drawings and masks, and invoking them for defense against vagaries of nature (and the British). It would be nice to think that modern civilization eschews such superstition. We aren't even close. I'm not referring to the enduring popularity of organized religion. Posterity will forgive us our icons, incantations, and reverence for spiritual leaders of dubious virtue. What our descendents will view with less forgiveness, and probably a good snicker, are the hopes and expectations with which we invest our blow-dried, secular leaders. One of the most difficult jobs in the world is to distinguish good leadership from good luck. At senior corporate positions, we rely on recent reported results to make promotion decisions because we have little else to go on, beyond our gut. It's easy to fail in this distinction when we ascribe a few years of growth in market share or profits to the leader of the time when everything we know clearly suggests that most performance over short periods is the result of exogenous forces combined and some massaging of the numbers. Earnings management is not confined to public disclosures; internal reports are rife with manipulations. The worst kept secret in business, as in politics, is that many people that we make our leaders are little more than expert credit hogs. What's worse than electing or appointing leaders on their self-proclaimed and often delusional sense of the tremendous good they will achieve, however, is how our judgment sticks against all countervailing evidence. We want to believe in heroic action, that our leaders can change our very climate, even when particular leaders fail. We reward their failure by endowing their positions with greater power and wealth. I believe that this is the essential problem of modern governance. When savior-CEOs fail to quickly deliver, we pay them to leave, then offer even more to their successor who demands the extra compensation for, among other things, the uncertainty of a job with unrealistic expectations. Being a tribal chief has always been an outrageously rewarded but somewhat risky position. Museum exhibits of primitive cultures leave me hopeful that the days of over-endowed leadership are numbered. I think that enough people will eventually see that heroic corporate strategies, much like heroic, centrally-planned solutions, have definite limits. I believe that we will somehow learn to de-politicize all of our organizations, including government, in the long-term unwinding of the accumulated power of faux-leaders, as civilization has done over the centuries by stripping shamans, priest-kings, and divinely-ordained monarchs of their temporal influence. Perhaps a couple centuries hence, our descendents will smile at our spurious identification of "major problems" in need of divine (or centrally-planned, or strategically planned) interventions. They will view our telegenic leaders with their swaggering promises the way we view ornately painted witch-doctors speaking of easier fishing and forgiving winters, if only their people endow them with enough obeisance and materiel to satisfy the gods.
	Shell Game With Incentives Item 1 from the Wall Street Journal, January 12, 2004 "Shell Lowers Proven-Reserve Estimate by 20% "...Recently Shell has fared poorly against its two closest competitors, Exxon Mobil of Irving, Texas, and London-based BP, in reserve replacement,triggering sharp criticism of Philip Watts, Shell's chairman. "Because of Shell's disappointing results, Sir Philip has been under fire almost since taking over the top Shell job in 2001...The reserve issue has re-ignitied questions about Sir Philip's future, especially since he led Shell's exploration business for much of the period that the company said it overbooked reserves." Item 2 from the New York Times, January 31, 2004: "Coke Employees Are Questioned In Fraud Inquiry "A former Coke employee filed a lawsuit contending that the company committed accounting fraud and increased revenue by shipping excessive concentrate -- a practice known as "channel stuffing" -- to bottlers in Japan and elsewhere. "According to two former employees who have been interviewed as part of the investigation, the federal investigators are particularly interested in the role of the company's chairman and chief executive, Douglas N. Daft. He ran the company's Middle East and Far East businesses in 1999, when the two employees say the channel stuffing took place." Is it worth noting that the main metric for Shell's exploration business is 'reserves', and for Coca Cola's international business it's 'volume'? The prediction here is that Watts and Daft are out in a month, but the connection of these dots may take a year or two.
	The Government Wants to Help The bull in the china shop that we call Congress, in their latest fit of outrage, gave us Sarbanes-Oxley (SOX). It's the perogative of government to impose ill-conceived experiments on the rest of us. Unfortunately, the government adds insult to injury by telling the shareholders who bear the absurd SOX costs that the whole exercise is actually good for them. The benefits of Section 404, in particular, will be speculative and uneven for everyone but the accounting firms charged with its implementation and the politicians who can say they "did something." My clients are accustomed to spending billions on information systems. If they felt they would have benefited, as the government suggests, from the billions more they are now spending to comply with SOX, they presumably would have done so without the threat of sanctions. A simple thought experiment can illustrate what, exactly, the shareholders have been forced to eat. Imagine that when Congress wrote up Section 404, instead of compelling all companies to implement it, it simply compelled companies to put that reform to a binding shareholder vote. Each firm's shareholders, after all, ultimately bear the cost of this legislation, and they are its supposed beneficiaries. Some companies may very well have passed the reform. Some certainly needed it. The entire investment community would have then been able to see the differential stock price impact, positive or negative, of adopting Section 404. Of course, Congress didn't give the shareholders a choice. It had neither the imagination nor the good intent to offer one. This law was pure politics--a pious reaction to headlines translated into a one-size-fits-all corporate governance reform. If Congress had offered a choice, the accounting firms who used Section 404 as a license to raid corporate treasuries would actually have had to sell managers on its virtues. Now, they offer the same benefits that the SEC likes to tout, but when faced with skepticism, whip out their statute and say, "Hey, you have no choice"--a sales pitch worthy of the mafia, except in the US you get to choose among four families.
	Our Plan Was Too Complicated I was called in by the financial management of a giant telecom whose finance department was in a tizzy. Their business unit managers were apparently engaging in sale-leasebacks of major facilities in order to grow their economic profit. Their motivation was obvious—their bonuses were based on EP. Even as the operating managers improved their bonus outlook, however, each of these complex transactions destroyed a little value. The finance department was appalled. “So,” I said, trying to understand, “you’re telling me that your operating managers, the ‘Bellheads’ you were so skeptical about in their ability to understand this measure, these guys learned how to arbitrage your cost of capital? Yes. And are you having any other problems with how your EP bonus plan is working? No. OK.” When I checked with the operating managers, they described these EP-boosting deals with pride. What looked to the finance department like a loophole needing to be closed was, to the business unit management, a clever strategy for boosting the measures for which they were held accountable. I reported back to Finance. “You have basically three choices. You can redefine the cost of capital to account for these deals. This would make your compensation measure difficult for your managers to game, but also more difficult for them to manage. Or, you could centralize lease vs. buy decisions, allowing you to enforce better discipline on them, but also adding a bureaucratic layer to business decisions. Or, you can let it go, which would be my choice.” The managers gasped. What kind of consultant faced with a clear problem tells us to do nothing? I told them to think about it for a week. After a week, they seemed better able to grasp the significant cost of complexity or cost of intervention. True, the sale-leasebacks bled hundreds of thousands of dollars per year. But undermining the authority of business unit managers or slowing down their decision making could hurt the company far more than that. So would undermining the integrity of their compensation plan with any changes designed to reduce their bonuses. The company eventually accepted my suggestion, with Finance educating the business units on the proper evaluation of buy vs. lease decisions, and having those units report their leases in a timely fashion so that they knew their decisions were getting at least some scrutiny. The number one reason I am given for why a company drops an EP or EVA plan is that it’s too complicated. Poor implementations of incentive plans indeed often yield unnecessarily complex metrics. What one sees, though, upon closer inspection is that those plans are dropped because they simply haven’t paid out; never mind that those paltry payouts were the deserved outcome. For me, having repeatedly seen non-financial operating managers figuring out complex strategies for arbitraging the cost of capital to make a few extra bucks, “the measurement was too complicated” just doesn’t hold up.