Business Value Enhancement Metric™ (BVEM)
Many of the annual exec rankings focus almost exclusively on share price improvement or some other concept of total return to shareholders. While we like making a buck from our stocks as much as the next person, the notion of measuring executive performance based solely on the company's stock price pop over a 365-day period strikes us as simplistic and incomplete. Take the following example:
It is widely accepted that stocks generally are priced based upon the future expectations for a company's performance; a company may not have to post any sort of actual performance improvements today, but because the market expects things to better for the company tomorrow, a wild run-up may occur in the company's stock price. For example, let's consider a company that is in the business of environmental remediation that has experienced flagging demand for its services over the past several years. To the great misfortune of many, but to the benefit of this firm's business prospects, a large oil company has just announced an out-of-control oil spill that will require billions of dollars in environmental remediation spend. The company should get its market share of the new mega work opportunity, and its stock reacts accordingly. In this case, what has the company's CEO done to demonstrate operational excellence today? Will the CEO lead her company to actually close a substantial amount of the work? Will it be profitable work for the company? What has the CEO actually done in this case beyond receiving benefits from a random, exogenous event?
A host of "unknowns" and "chance" events exist in the example we shared; it is our strong preference to judge executive talent using additional data points rather than solely relying on stock prices, which can be prone to speculation and are not necessarily tied to performance outcomes.
The Business Value Enhancement Metric™ (BVEM) takes a more balanced, measured and comprehensive approach to executive performance analysis. Share price is a component of BVEM. But BVEM includes other quantifiable measurements of value creation, in order to provide a more thorough picture of executive performance. These important indications of management skill include:
Margin Expansion: A company which is growing its operating income as a percentage of revenues from year to year is generally operating with greater efficiency. This doesn't happen by accident -- leadership must pull the right levers to more effectively market products, streamline operations and good economies of scale.
Earnings per Share: When there are more earnings per share of stock available at the end of the year, executives have usually added value somewhere along the way to make a company more profitable.
Return on Equity: Growing a company's earnings can be accomplished in a number of ways, but the great differentiator among managers is how earnings compare to the equity employed in a business. The best managers can lead the way to earnings growth, while utilizing limited amounts of incremental equity capital to fund projects.
Book Value per Share: Companies that are built to endure periods of economic hardship and out-resource their competitors have Assets that exceed and continue to grow relative to their Liabilities. Book Value represents this difference between Assets and Liabilities, or the Equity of a business. We like companies that are building their fort by adding to Book Value per Share each year.
These input metrics, along with others, combine in BVEM to paint a better and more complete picture of executive performance. BVEM scores run from one (highest ranking possible) to however many executives are in your comparison group (this number being the lowest possible ranking). An average is taken and a composite BVEM score is produced.
For example, let's assume you have a comparison set of 10 executives:
- If an executive is at the top in all BVEM categories, the BVEM score would be "1"
- If an executive is at the bottom of all BVEM categories, the BVEM score would be "10"
- Therefore a score of "1.85" would be quite good, whereas a "9.38" would indicate relative weakness.
Note: In Chiefist's blog posts, we may not show all results of an assessment search. Therefore, an executive's BVEM score may be higher (worse) than his or her ranking. He or she ranks more highly because other executives' composite BVEM scores are higher (worse).