Managing for value. It's not just about the numbers

In theory, value-based management programs sound seductively simple. Just adopt an economic profit metric, tie compensation to agreed-upon improvement targets in that metric, and voilà! Managers and employees will start making all kinds of value-creating decisions. If only it were that easy. The reality is, almost half of the companies that have adopted a VBM metric have met with mediocre success. That's because, the authors contend, the successful VBM program is really about introducing fundamental changes to a big company's culture. Results from their major research project into the practice of VBM reveal that putting VBM into practice is far more complicated than many of its proponents make it out to be, requiring a great deal of patience, effort, and money. According to the authors' study, companies that successfully use VBM programs share five main characteristics. First, nearly all made explicit and public their commitment to shareholder value. Second, through training, they created an environment receptive to the changes the program would engender. Third, they reinforced that training with broad-based incentive systems closely tied to the VBM performance measures, which gave employees a sense of ownership in both the company and the program. Fourth, they were willing to craft major organizational changes to allow all their workers to make those value-creating decisions. Finally, the changes they introduced to the company's systems and processes were broad and inclusive rather than focused narrowly on financial reports and compensation. A VBM program is difficult and expensive. Still, the authors argue, properly applied, it will put your company's profitability firmly on track.