The second group of engineers, all twentysomethings -- as Boldt was at the time -- didn't own enough stock to matter. The company had grown so large that their efforts wouldn't make much of a difference in moving the stock price. And they held so few options that even if the company did do well, they wouldn't enjoy substantial benefits. "There were no real incentives for me at TI," Boldt says. The challenge for big companies today, says Boldt, is to create pay plans that give employees incentives, that generate both a sense of ownership and a feeling of leverage over the company's performance. When companies do that, CalPERS views those plans as an indicator that their stock will pay off better in the long run. Once again, says Boldt, companies have to answer a key question: "How can I tie the well-being of the person performing a service directly to the financial product of his labors?"
Boldt thinks that he's found an answer to that question in a new application of an old measure. The measure is called economic profit, although it's better known today as EVA, or Economic Value Added (a trademark of Stern Stewart & Co.). EVA is what's left after you subtract a charge for the capital that a business unit uses (the weighted cost of capital multiplied by the amount of capital used) from earnings (specifically, net operating profit after taxes). Because EVA takes into account shareholders' capital, many financial experts today believe that it offers a sharper picture of a unit's true assets than the net income of the value produced by that unit.
EVA is essentially the income that a company earns above and beyond what its shareholders expect from investments of equal risk. Suppose you invest in a company, expecting that it will earn 15%. If the company does earn 15%, its eva is zero. If it earns more than 15%, its eva goes above zero. The corollary is that, as a company's EVA climbs, its stock price climbs as well: Shareholders will bid up a corporation whose earnings exceed expectations -- a corporation that "adds economic value."
What Boldt likes about EVA is not the measure itself -- which by now is old news. What Boldt sees in EVA is a tool that companies can use to link "Economic Value Added" to employees' rewards. As companies create accounting systems to calculate the profit generated not only by the company as a whole but also by units within the company, it becomes possible to track the contributions that people make and to pay them accordingly.
"What really matters here is not just measuring EVA," says Boldt. "The epiphany for me was how you can use it to offer incentives to people in a corporation to act like owners. It takes away the lottery effect in larger companies." Like stock options, EVA-linked pay could reward individuals who come up with new ideas that help a company grow. "You can stretch EVA from the highest, most strategic decision in the corporation to the lowest tactical decision, and there's integration," says Boldt. "What EVA allows you to do is atomize your compensation system, so that you can get workers to think like owners. We need a good mechanism to align the interests of CalPERS with the interests of Joe in engineering. eva makes that link."
Boldt's linking of pay to corporate performance is simply the latest innovation in his ongoing effort to devise new measures for the new economy. Whether those measures relate to governance systems, workplace practices, or compensation methods, the challenge is the same: to accommodate an economy in which intangible assets -- chief among them, the creativity and contributions of people -- are critical to economic decision making.
Bill Birchard (bbirchard@aol.com) is coauthor of Counting What Counts: Turning Corporate Accountability to Competitive Advantage (Perseus books, 1999). He is also a contributing editor at CFO Magazine. visit the following organizations on the web: macromedia Inc. (www.macromedia.com), silicon valley bank (www.svbank.com), Nortel networks (www.nortelnetworks.com), and CalPERS (www.calpers.ca.gov).
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