(FORTUNE Magazine) – Scores of companies have turned to economic value added (EVA) over the past few years as a new way to gauge financial performance. Highly regarded corporations like Coca-Cola, AT&T, Quaker Oats, and Briggs & Stratton have set up EVA measurement systems throughout their organizations. These have provided financial discipline, encouraged managers to act like owners, and, most important, have boosted shareholders' fortunes.

But despite these widely reported successes, only a handful of companies today are getting EVA right. What we've seen in the rush toward EVA is that many companies don't know how to implement it and therefore aren't getting nearly its full benefits.

Simply put, EVA is a company's net operating profit after taxes and after deducting the cost of capital (see box). The capital is all the money tied up in such things as heavy equipment, real estate, and computers, plus so-called working capital--mainly cash, inventories, and receivables. The cost of capital is the minimum rate of return demanded by lenders and shareholders, and varies with the riskiness of the company. When you are making more money than your cost of doing business plus your cost of capital, you are creating wealth for your shareholders. Sounds elementary--except that many business people don't know their true capital cost, and some don't even consider it. That means they probably don't know whether their company or operation is becoming more valuable or less.

Here are the five main ways business people err in applying EVA:

THEY DON'T MAKE IT A WAY OF LIFE. The most common mistake is to think that all you need to do is calculate EVA. If a company tells me that's what they're doing, I say, "Excuse me, but you're only calculating EVA. You're not adopting it." EVA is really the centerpiece of a comprehensive financial management system. That means all the policies, procedures, measures, and methods companies use to guide and control their operations and strategy. It has to do with how they set overall financial goals, how they communicate those goals inside the organization and outside to the investment community, and how they evaluate opportunities to build the business and invest capital, whether it's for the purchase of a single piece of equipment or the acquisition of a company.

Example: Many companies fail to tie compensation to changes in EVA. Say you have a CEO whose bonus and pension are linked to earnings and who will be retiring in three years. A rational CEO might slash R&D to get short-term profits up; five years down the road profits will be hurt with no new products coming onstream. But what you spend on R&D doesn't affect EVA in the year you spend it, so the CEO has nothing to gain by squeezing R&D. In other words, once EVA is adapted to a given system, it's difficult for managers to play games with the budget at shareholders' expense.

MOST MANAGERS TRY TO IMPLEMENT EVA TOO FAST. You can't implement EVA overnight. For an enterprise with sales under $250 million, becoming an EVA company takes four to five months. For companies with up to $1 billion in sales, it could take six to nine months. And for a very large company, it could take a couple of years.

Start with top management using it day to day, then gradually push it down through the ranks. Some companies make the mistake of trying to implement it all at once, but they'll probably have too many people to train and too much disruption. And if top managers don't understand EVA deeply, how can they explain it to those working for them?

While EVA should be fully integrated into your company, don't overdo it by trying to apply it to every nook and cranny. That makes it too complicated and expensive to administer. Engine maker Briggs & Stratton found the right balance for EVA. Previously managed as one big company, it was highly vertically integrated and made many different engine lines. Top management first considered figuring just one overall EVA measurement, but they recognized that a single calculation wouldn't show what was really going on in different parts of the company. So they decided to divide the company by types of engine and by critical functions (manufacturing, distribution, and so forth) and measure EVA in those areas. Carving the company up into finer pieces would have made information gathering too expensive and given people too much incentive to maximize locally at the expense of the company.

THE BOSS LACKS CONVICTION. Too often the CEO or division or department head abrogates his responsibility to force the implementation of EVA from the top down. This is necessary because EVA is not always something operating people will want to do. Say you have mediocre managers who have been overpaid, who have a bonus plan that pays them to meet their budget, and who can easily meet their budget. Life is good. What incentive do they have to make a change to EVA, under which they will suddenly be held accountable for creating value? They may well resist it. Yes, there's a process of selling EVA, but it should be sold with the idea that it's going to be bought.

Also, if the boss is not totally committed, staffs can form fiefdoms and war among themselves. Say the CFO is leading the EVA charge, and the head of human resources, who is also very powerful, sees the EVA incentive plan as poaching on his territory. The human resources people have incentives to undermine EVA, or they let the CFO develop EVA while they keep the old incentive program in place and simply call it an EVA program. That blows the whole thing. You lose about 50% of the power of EVA if the incentive plan is not truly driven by it.

MANAGERS FUSS TOO MUCH. When implementing EVA, companies tend to make it a big philosophical issue. Managers try to convince everyone that, by George, we've got to create shareholder value. And they get into a big debate about what it means to create value for the shareholder as opposed to the employee or the community. This becomes terribly distracting and ultimately meaningless. You should put the philosophizing aside and say to your people something like: "What if we found a measure of financial performance that really captures all the things a person can do to run the business more efficiently, to satisfy customers, to reward shareholders? Wouldn't it make sense to use that to shape our financial decision-making?" And leave it at that. If you integrate EVA well enough, all your stakeholders will be taken care of.

TRAINING GETS SHORT SHRIFT. Companies sometimes don't disseminate EVA knowledge widely enough through the organization. Those that understand EVA know how important it is to train everyone in the organization because even those with the smallest jobs can help create value. This means linking EVA to key operating metrics like cycle time or inventory turns and making sure the people involved understand how EVA fits in. For instance, inventory turns have an EVA payoff because if you're turning your inventory faster, you have reduced the amount of capital you need and thus have raised EVA.

Varity, a farm equipment manufacturer based in Buffalo, gave EVA training to all 3,500 of its European employees, including the guys who tighten bolts on tractors. One man who managed its inventory stockroom told his boss one day, "My suggestion, now that I understand EVA, is that you put a lock on the warehouse door and throw the key away. We're filling up this warehouse with inventory just because it's there. If you gave us a football field, we would fill up a football field. If you gave us a broom closet, we'd fill a broom closet. So give us a broom closet. Make inventory the responsibility of the dispatchers on line." When his boss asked him why he didn't say this before, he said, "Nobody asked."

Done right, EVA precipitates a major cultural change without requiring people to be aware of it and go on camping trips together or beat drums. What you're doing is very quietly weaving into your culture a new financial management, measurement, and incentive system. Before you know it, what jumps out is a new culture that's right for times of rapid change and turmoil. People put the creation of shareholder value at the top of the pyramid, and when that happens, chances are your business will end up on top too.

G. Bennett Stewart III is senior partner at Stern Stewart, the New York consulting firm that created EVA.