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TheStreet Open House

Tie Pay to Performance -- The Innovators

Stocks in this article: BAC AIG F

With the government's intervention in corporate America and the bold steps taken by Feinberg on behalf of the White House, compensation, in all its forms, has received a black eye in the house of public opinion. Yet even when economic times are bad and businesses are under extreme pressure to contain costs, it's important to maintain a reward system to hold on to key talent. While it takes strong leadership, a culture based on accountability, and effective management to drive profitability, the best carrot and strongest stick are often compensation. This rings true at all levels of an organization, and that's a good thing unless it's mismanaged or abused.

While not trying to oversimplify the financial crises that several companies now face, the truth remains that problems don't happen overnight. Business is challenging and it takes experienced leaders to make the hard calls that will right a floundering ship. Yet many businesses just keep doing things that produce bad results while expecting a different outcome. By the time companies start making changes, it is often too late, resulting in choices that are shortsighted and disastrous. Companies take high write-offs, reduce their work forces, cut benefits, dividends, and earning expectations, and as we've recently seen, accept government bailouts. It's an expensive and vicious cycle.

Perhaps one of the most visible examples of waiting too long to change is AIG (AIG - Get Report). Other examples are the U.S. automakers General Motors, Ford (F - Get Report) and Chrysler.

These companies knew for many years that Far East manufacturers had their sights set on the US. So why did they wait until they were forced to take action? When all the excuses are removed, it boils down to leadership.

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