Since Triad Guaranty Inc. went public in 1993, its stock has risen nearly 600%-success that chief executive officer Darryl W. Thompson attributes to an analytical tool known as EVA.
Now the Winston-Salem, N.C., mortgage insurance company wants to show its mortgage lender customers how to use this system to their advantage and hopes to hold seminars explaining how EVA, or economic value added analysis, can be applied to the home loan industry, Mr. Thompson said.
In a nutshell, EVA is a company's after-tax profits minus the cost of capital employed to produce the profits. The cost of debt and equity are used to calculate EVA. Proponents of the model say EVA measures how much wealth a company is creating for shareholders.
Triad worked with Bobby Lamy, an associate professor of finance at Wake Forest University, Winston-Salem, to install its EVA plan.
The insurer is using EVA to determine the best ways to deploy its capital, Mr. Lamy said. EVA "gives some guidance to financial strategy."
For example, the company announced Thursday that it would issue $35 million of debt at a rate of 7.9%. Mr. Thompson said Triad was taking advantage of low interest rates to issue these notes. If the company had chosen to issue equity, the rate would have been closer to 15%.
Triad is also using EVA to gauge risk in the policies it sells to lenders and is pricing the policies accordingly, Mr. Thompson said.
Like many companies, Triad also has used EVA to design an incentive plan for its employees. Mr. Thompson said a plan for senior management was established in 1996 and other employees began to participate last year. The new plans have been well received by employees because there are no caps on bonuses.
"The payout we anticipated a year ago is probably going to be double than we thought," Mr. Thompson said, "and a lot of it has to do with the effort of our employees to hone in on what makes the business work."
Convincing the volume-obsessed mortgage banking industry to change compensation structures might not be easy to do, observers said.
But Charles C. Kantor, a vice president at Stern Stewart & Co., the New York consulting firm that pioneered the use of EVA with industrial companies, said mortgage companies need not drastically change their incentive structures.
"Senior management certainly should be paid on some measure that reflects profitability," he said, "and they will direct the troops in the right direction. You may just want your loan officers to worry about their commission plans."
Mr. Kantor said Stern Stewart has worked with banking companies that have mortgage lending operations, such as Centura Banks Inc. and Banc One Corp. The firm is also installing EVA at another commercial bank with a sizable mortgage business, he said.