For the past 70 years, Varian Medical Systems has helped lead the fight against cancer by developing new and more effective cancer treatments and is today’s market leader in radiation therapy, treating over four million cancer patients last year. From its founding in 1948, Varian’s competitive advantage has been seen as deriving from its “culture of innovation”—a culture that has been fueled by significant investment in research and development. But after a long run of innovation that extended Varian’s therapeutic reach and resulted in strong growth, the company’s shareholder returns began to sag. And as a number of analysts noted, the stagnation of the share price appears to have been highly correlated with a slowdown in the company’s release of new, innovative products.
To help steer the company back toward the success of its old ways, Varian’s management put in place a new measure of periodic corporate operating performance that helped management gain more insight into the most promising areas for allocating resources and investment in different business lines and regions. The intent behind adopting this new measure, which also became the basis for the incentive pay of the company’s executive team, was to restore and reinforce the company’s high-investment strategy while instilling strong discipline for earning market returns on those investments and, at the same time, meeting the short-term demands of quarterly earnings (EPS) targets.
In this article, the company’s CFO and one of the company’s advisors describe the thinking behind, the actual implementation of, and the early returns derived from Varian’s adoption of a new performance measurement and reward system. The effects go beyond those normally associated with adopting a “merely financial” measure, including a reinvigoration of ownership spirit and a much admired corporate culture of innovation and growth.