(FORTUNE Magazine) – GRAB ANY Wall Street analyst by the lapels and he'll tell you PepsiCo is a brilliant marketing company. Well, sure, but then ask CEO Wayne Calloway how it got that way and he'll talk not about those slick ads starring Madonna and Michael Jackson, but about what he calls the three P's: ''people, people, people.'' Ah, touchy-feely management? Anything but. Behind Calloway's alluringly alliterative slogan lies the country's most sophisticated and comprehensive system for turning bright young people into strong managers. Says he: ''We take eagles and teach them to fly in formation.'' Described by colleagues as ''tough as nails,'' Calloway runs a boot camp for managers that makes Parris Island look like Coney Island. This 53-year-old CEO, who with a bald head and aquiline nose looks himself a bit like an eagle, sets back-breaking standards and raises them methodically each year. Those who can't cut it wash out. To prove himself, each manager gets to act like an entrepreneur -- risk taking is de rigueur, memos scarce, meetings few, and second-guessing rare. Sixty-hour weeks are typical, and managers often work Saturdays and Sundays. But teamwork counts too. If the team says move to Patagonia, you move. Although only aggressive achievers survive at PepsiCo, those who do seem to love it. Perched in Calloway's office in bucolic Purchase, New York, 30 miles north of Manhattan, is a bronze eagle, a gift from his managers, bearing the inscription ''We're proud to fly in your formation.'' PepsiCo takes people development more seriously than perhaps any other American corporation. Calloway spends up to two months every year personally reviewing the performance of his top 550 managers, discussing their futures with their bosses and with the personnel department. Calloway, who says he knows most of the 550 managers and spends anywhere from five to 30 minutes reviewing each one, states with conviction, ''There's nothing I do that's more important.'' In all, he spends 40% of his time on people issues. He expects the people below him to do the same, so that by the end of each year every one of the company's 20,000 managers knows exactly where he or she stands. To the winners go spoils -- first-class air travel, fully loaded company cars, stock options, bonuses that in good years can hit 90% of salary for top managers. Promotions come fast -- every two to three years is standard. While corporate politics will always exist, PepsiCo strives to be the closest an organization of this size can come to a meritocracy. In the words of former chairman Donald Kendall, ''PepsiCo is the ultimate capitalistic engine.'' CALLOWAY, who went through this boot camp in Kendall's day, firmly believes that ''if you take care of your people, you'll take care of your stockholders.'' Though Omaha stockpicker Warren Buffett recently bet on Coca- Cola by buying 6.3% of the shares, Calloway's company has been setting the pace in profits. Over the past two years PepsiCo's profits grew 66% on top of earnings that were already a record, an amazing performance for a behemoth with annual sales of $13 billion. Last year, says Emanuel Goldman, a Paine Webber beverage analyst, the company gained market share in all its major businesses -- Pepsi-Cola, Frito-Lay, and restaurants (Pizza Hut, Kentucky Fried Chicken, Taco Bell) -- while also increasing operating margins in snack foods and beverages. In FORTUNE's latest annual survey of corporate reputations, U.S. executives and security analysts for the first time ranked PepsiCo among America's ten most admired companies. It ranked first in its industry at attracting and developing good people. It's no surprise that headhunters often set their sights on PepsiCo. Says Heidrick & Struggles headhunter Gerry Roche, the man who recruited Apple CEO John Sculley from the company: ''There are no flakes in there. If I had to key in on a couple of words, they would be training and discipline. These guys know the basics.'' As one executive who left PepsiCo adds with slightly less finesse, ''The place is full of guys with sparks coming out of their asses.'' Other companies can gain much by adopting PepsiCo's system, but it won't be easy. Warns Harvard business school professor Andrall Pearson, PepsiCo's president for 14 years and a man instrumental in creating the company's development program: ''The biggest obstacle is not having the conviction to shake up the culture. You won't get stronger managers by taking itsy-bitsy steps.'' At first it will mean high turnover, lost continuity, and some bad morale. Pearson says that a CEO who tries the PepsiCo method should start seeing major results in some parts of the business in two years and throughout the organization within five. At the heart of PepsiCo's Darwinian system are two distinctly different types of management evaluations. One is designed to weed out the weak and the other to nurture the strong. The first, called the annual performance review, requires a boss to sit down with each of his managers at least once a year and discuss performance. The focus is on what the manager actually did this year to make a big difference in the business, not whether he's a nice guy or wears the right color socks. Did he meet his sales target? Did he develop a successful new taco chip or soda commercial? Says Michael Jordan, the hard- driving CEO of Frito-Lay: ''Nothing is ever good enough.'' If the manager met his goals, fine. His boss then typically ups the standards for next year. But pity the manager who isn't getting results. First the boss will try to find out why and help him fix it, but after a year or two of missing the mark, the loser's a goner. Brenda Barnes, a fast-rising, 35-year-old Pepsi-Cola vice president with 700 people under her control, sums it up best when she says, ''We'll never be nor should we be a warm and cuddly environment.'' There is a merciful side to all this. People tend to get weeded out early in their careers rather than later, when it's much harder to find another job.

Such a harsh system has costs. One manager who wasn't considered PepsiCo material found himself walking around the hallways with his face twitching. When the inevitable day of reckoning arrived, he asked his reviewer why he hadn't made it. Looking him straight in the eye, his executioner replied, ''You're not enough of a bastard.'' This doesn't mean that the so-called ''soft side'' of management gets completely ignored. The company realizes that its tough style can sometimes get out of hand. Says Jordan of Frito-Lay: ''We've got a lot of bright guys who piss people off.'' To help remedy that, PepsiCo has a feedback program in which the bosses get evaluated by their subordinates in confidential reports. Says the man who runs the PepsiCo feedback program, Robert Stringer of Sherbrooke Associates in Lexington, Massachusetts: ''Managers won't get any better unless they look in the mirror occasionally.'' In one case a manager at Pepsi-Cola who fits the mold of what's known around the company as Pepsi Pretty -- from a good school, moving like a rocket, and thinks he walks on water -- was getting great business results. But then he read his feedback reports from his underlings. They perceived him as cold, aloof, and manipulative, the kind of guy who would bark out orders at a meeting and then leave. Shocked, Mr. Pepsi Pretty tried to change his ways by sharing his ideas and spending more time with his people. Though he didn't completely change from a Mr. Hyde to a Dr. Jekyll, the manager found his feedback reports the following year to be much more positive. Yes, participative management works even at PepsiCo. The company has found that bringing in a few stars from the outside helps lift standards. In the 1970s and early 1980s PepsiCo was saddled with many weak managers, and then-president Pearson set about fixing that by recruiting a dozen or so top people from corporations like General Foods and from consulting firms like McKinsey & Co., where he had been a partner. He kept these stars at headquarters for a while, allowing them to learn the ropes by assigning them a special project in, say, sales or acquisitions. Pearson then farmed them out to key positions throughout the corporation, where their examples raised performance standards. After a few years, more strong managers than weak ones remained, and PepsiCo could shift its focus to developing people from within. To make the team more competitive, Pearson had his managers focus on a single rival rather than worrying about quarterly earnings or stock prices. ''Having a villain,'' says Pearson, ''is one of the most important features of an innovative management team.'' Today this spirit is seen in Pepsi-Cola's never-ending mission to one-up Coke in the cola wars. On March 2, Pepsi-Cola ran a two-minute TV commercial featuring Madonna and her new single, ''Like a Prayer.'' A record 250 million people around the world saw the ad, a sanitized cousin of a controversial music video showing a stigmatic Madonna dancing around burning crucifixes. The religious symbolism irked some viewers and, incidentally, generated lots of publicity for Pepsi-Cola. As sure as geese head south at the first signs of cold, PepsiCo every winter carries out the second step of its evaluation process, dubbed human resource planning or HRP. The idea is to think seriously about the careers of PepsiCo's 20,000 managers, deciding where and how each can best help the corporation. During the two months Calloway spends discussing the performance of each of the 550 managers directly under him, he makes a point of challenging each manager's boss by asking hard questions about the person's potential.

THE MANAGERS then get divided into four categories. Those at the bottom are out. In the middle, people are separated into those who need more time on the job or special training, and those who are promotable but have nowhere to go at present. The top group gets promoted. Some stars get moved to a more challenging job within the division, others get shifted to a different division or function, and still others get shipped overseas. Says Calloway: ''We believe that different experiences make great managers.'' One drawback to this approach: fast promotions can mean that a company loses continuity. Just when a marketing manager is putting the final touches on a Frito-Lay promotional campaign, for instance, he might be yanked off to run the Kentucky Fried Chicken division in Swaziland. ALL THE MANAGERS who have made it at PepsiCo so far have had broad experiences within the organization, and Calloway is a good example. Son of a North Carolina shopkeeper, Calloway played guard on the Wake Forest basketball team, then worked in financial jobs at Richardson-Vicks and ITT before landing a corporate planning job at PepsiCo in 1967. Since then Calloway has held nine jobs, including running a joint Pepsi and Frito-Lay division in Canada and Frito-Lay's business in the states. The different jobs gave him the financial, marketing, operations, and international experience to catapult him to the CEO slot in 1986. No HRP meeting would be complete without a personnel manager who sits in on the discussion. From serving in different divisions -- personnel people get evaluated and rotated too -- these folks gain a broad view of where opportunities lie within the corporation. They also learn firsthand what makes PepsiCo work. A new personnel manager at, say, Frito-Lay will spend his first two weeks out on a delivery truck. Says Calloway: ''We expect our personnel people to be in the business up to their eyeballs -- to know sales, profits, and margins.'' Once the two-step evaluation system is up and running, it's time to start stressing values, and at PepsiCo that means a strong sense of ownership. The company encourages managers to make decisions on their own and make them fast. A few years back Roger Enrico, CEO of PepsiCo Worldwide Beverages, the company's $4.6-billion-a-year soft drink arm, decided to sign up pop star Michael Jackson for a Pepsi commercial at a record $5 million fee. He didn't telephone CEO Kendall to tell him what he was doing until a few hours before the contracts were to be signed. Enrico says blithely, ''It didn't occur to me to tell him.'' More recently, Coke took Pepsi by surprise during the last Super Bowl broadcast, when it staged its innovative 3-D Diet Coke halftime show and aired spots claiming that some two million people a year were switching from Pepsi, with the lion's share going to Diet Coke. Pepsi believed the numbers were plain wrong. That week a Pepsi executive was riding up from Manhattan with Phil Dusenberry, CEO and creative head of Pepsi's ad agency BBDO, to see Enrico at his Westchester office. In the limo Dusenberry and the Pepsi executive worked out the script for a rebuttal commercial and explained it to Enrico when they arrived. He gave it the OK. The commercial, shot and aired within a dizzying three days, showed a crazed-looking Coke executive in a boardroom staring myopically at his statistics through 3-D glasses as a voice- over says, ''Gentlemen, I trust we're all seeing this the same way.'' Coke has since watered down its claim. Says Enrico: ''If we had sent this up the line for approval, it would have taken a month.'' PEPSICO BELIEVES that letting young managers take on responsibilities can pay off big. In one instance a 24-year-old Babson College graduate named Peter McNally was put in charge of a $500-million-a-year chunk of Frito-Lay's snack business. The assignment: Boost Frito-Lay's single-serve business, those small bags of taco and potato chips. The chips were sold in one-ounce bags, and McNally figured there was a market for bigger, two-ounce bags that would appeal to young men with prodigious appetites. He launched the bigger bag in 1985, and sales in this segment of Frito-Lay's business have since been growing 15% a year. Today, at the ripe old age of 30, McNally is vice president of marketing services for PepsiCo's $1.5-billion-a-year Taco Bell chain. PepsiCo's system leads to a surprising recruiting strategy. It's nearly impossible these days to get some hotshot from Harvard or Stanford to take a line job, so PepsiCo shops around at second-tier business schools for people willing to get their hands dirty. Last year it hired Brian Vent, an MBA from the University of Virginia. While most of his schoolmates took glamorous corporate jobs or set off to Wall Street, Vent toils as an assistant manager in a Pizza Hut restaurant in Washington, D.C., where he spends much of his time at the chopping table helping with the onions and peppers or spiffing up the restrooms. He can expect within a year or two to move up to regional manager, with 40 or so restaurants under him. The company has learned there's no way a manager will grow strong unless he gets used to taking risks. As Kendall says, ''If you go through your career , and never make a mistake, you've never tried anything worthwhile.'' Since it's natural for most managers to fear putting their careers on the line, the company makes clear that those who take big fliers and fail won't end up stretched out on the rack like some medieval miscreant. ''You're safe,'' says Calloway, ''as long as it's a calculated risk. You don't want a guy swinging at the fence every time, and it's blind luck if he hits a home run.'' PEPSI-COLA PRESIDENT Craig Weatherup, 43, remembers moving to Tokyo at age 30 to run the company's Pepsi business. After a few months he wanted to launch Diet Pepsi in Japan even though his boss in New York told him it was a dumb idea. Weatherup went ahead anyway; Diet Pepsi sold well for a month and then flopped. The Japanese, it turns out, associate the word diet with something medicinal. After the $3 million debacle Weatherup's boss told him to be more careful next time but not to stop taking risks. Weatherup says he and his senior colleagues openly talk about their mistakes to encourage younger managers. PepsiCo teaches its managers that the best time to take risks is when everything seems to be going well. Explains Calloway: ''The worst maxim around is 'Don't fix it if it ain't broke.' You'd better be improving it, because your competitor is.'' To get closer to the tastes of its customers and to decentralize even more, Pepsi-Cola last fall engineered a massive reorganization into four regional divisions, a move that on the surface wasn't necessary since the unit had just come off a record year in earnings and sales. As Calloway says, ''Most companies would have been satisfied with that.'' In this freewheeling culture, a committee is defined as a dark alley down which ideas are led to be strangled. PepsiCo managers loathe meetings and memos; people pick up the phone and get things done. One of the few memos Andrall Pearson ever wrote at PepsiCo said if you have to write a you-know- what, keep it to one page, state the solution in the first paragraph, and use the rest of the page to explain the problem. Karl von der Heyden, who joined PepsiCo in 1974 as controller and is currently CFO of H.J. Heinz, recalls that when he walked into his new office in Purchase it was completely empty of files and reports. He says, ''They told me I didn't need any files, and they turned out to be right.'' Big decisions get made face to face. Says Pearson: ''I want to look a man in the eye to see if he has conviction.'' Often this means intense shouting matches over the merits of an idea, but the arguments tend to be intellectual confrontations, not exercises in character assassination. As Tom Rattigan, a former CEO of PepsiCo Bottling International who left the company after 14 years, remembers it, ''You could have a beer with the guy that night despite the fact that you'd gone nose to nose with him at a meeting in the afternoon.'' People who play corporate politics don't last long. ''This company is results oriented. Period,'' says Calloway. ''I don't care who you know.'' PepsiCo has the kind of culture that scorns hidden agendas and puts a premium on integrity, which Calloway defines as being open and honest. If somebody says no, he means no. To make sure it stays this way, Calloway keeps his crew running hard. ''If you keep people moving fast,'' the CEO explains, ''a guy doesn't have time to sit around and wonder whether someone is trying to cut off his legs.'' PepsiCo deeply believes that managers who act like owners, run lean, and get big results should get big rewards. PepsiCo treats its managers extremely well. Top middle managers earn between $96,000 and $144,000 annually, not counting bonuses, stock options, and other perks (see table). How does it justify this largess? Says Roger Enrico: ''Treating the people well who produce is cheaper than having a big bureaucracy following them around trying to keep down costs.''

BUT MONEY is only part of the reward of being a manager at PepsiCo. Calloway believes in the importance of pride, and that means making his people feel special. At headquarters a world-class sculpture garden blooming with Calders, Noguchis, Rodins, and Giacomettis stretches over 150 rolling acres. A glitzy health club offering aerobic lessons and massage lets pressured employees take a breather from work. On the road PepsiCo people can stay at the Ritz rather than the Ramada. They fly first-class. Explains Calloway: ''Flying first-class is a state of mind. We're a first-class company with first-class people.'' With so much first-class talent on board, some PepsiCo stars eventually get frustrated as the pyramid narrows and leave for other opportunities. But that scarcely diminishes the advantages of deep bench strength. As Calloway says, ''I hate to admit it, but if I got hit by a truck, PepsiCo would keep going like nothing happened.'' That's something every CEO should be able to say.

BOX: PEPSI'S PERKS

FOR TOP 550 MANAGERS First-class air travel Luxury hotels on the road Company car every two years or $11,000 a year Annual bonus of 25% to 90% of salary

FOR ALL EMPLOYEES Gym with masseuse 150-acre sculpture garden Unlimited free Pepsi at work

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: INVESTOR'S SNAPSHOT PEPSICO