This is an enhanced edition of the HBR reprint R0107D, originally published in July/August 2001. HBR OnPoint Articles save you time by enhancing an original Harvard Business Review article with an overview that draws out the main points and an annotated bibliography that points you to related resources. This enables you to scan, absorb, and share the management insights with others.
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 voila–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. Putting VBM into practice requires 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 of 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. The authors argue that properly applied, a VBM program will put your company’s profitability firmly on track.