Historically, 40 senior managers were eligible for the annual incentive compensation plan. Within this group, a smaller subset participated in the long-term incentive plan. These plans targeted levels of performance of senior level managers in the following areas: cash flow, sales growth, direct labor variances, inventory turns, accounts receivable, gross margins, and finally individual projects. Interestingly enough, in 1992, the annual incentive plan only covered several dozen employees. In addition, the long-term incentive program covered even less people, covering only two people in 1983 and fortunately was broadened later to include more managers. The long-term incentive plan made one payment at the end of 5 years. This payment was a phantom payment stock tied to the increase in the book value of the stock.
The proposed Economic Value-Added (EVA) Incentive System for management links management pay directly to the creation of long run economic value of stockholder. This new system would satisfy Mr. Duckworth's need to align the interests of both shareholders and management alike. Another problem this system addresses is annual hassles the company must endure for assessing bonus compensations each year. Since the system is self-adjusting, such hassles can be avoided and the plan integrates the annual and the long-term plan that will pay on annual results but designed to build long-term shareholder value.
