Tie Pay to Performance -- The Innovators

Linking compensation to performance is the most basic form of accountability.
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In light of recent events in which the role of government and executive pay has moved to center stage, the parameters of compensation have taken on a whole new twist. But whether publicly traded, privately held, or government-supported, the basis for compensation in all companies should ultimately rest with performance.

Tying compensation to performance is the most basic form of accountability. It seems such an obvious connection, yet I can't believe how frequently I find that year after year workers who don't meet their objectives continue to get pay raises. If there are no consequences for poor performance, you can't expect improvement. What you can expect is a company full of poor performers.

Accountability at the Top

Looking specifically at executive pay, the expectation for performance should be even greater. In fact, there should be a direct link between executive compensation and the company's stock performance -- a competitive base salary with bonuses and stock options tied to company financial performance exercisable in predetermined tranches instead of at will.

An effective way to link the two is to compare the company's stock performance to the

S&P 500

, as well as the company's peer group over an appropriate period of time. Maintaining a balance between short-term and long-term compensation is essential in order to promote effective risk-taking. Interestingly enough, in 2001 executive pay linked to stock performance was an issue and one of the biggest concerns was with

Bank of America

(BAC) - Get Report

. Perhaps if something had been done internally then, Bank of America would not be standing at the mercy of President Obama's pay czar Kenneth Feinberg as it is today.

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) - Get Report

. Other examples are the U.S. automakers

General Motors



(F) - Get Report




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.

But here's the good news. When managed effectively, companies in distress can recover. Ford provides one of the strongest examples of how superior leadership can trump adversity. With CEO Alan Mulally at the helm, struggling Ford proactively arranged for its own financing and refused to accept a government bailout. Mulally turned the tide at Ford with exceptional leadership and effective management. The result: Ford recently announced third-quarter profits of $1 billion, released 2011 guidance for solid profits, and received an investment rating upgrade from Moody's.

And what's Mulally's reward for being at the helm? He earned total compensation in excess of $17 million in 2008 and remains in a position where the government's opinion has absolutely no bearing.

I am not a proponent of compensation caps or the government running any business. Free enterprise, capitalism, risk-reward, entrepreneurship, and innovation have made the U.S. the wealthiest nation in the world; and I'd like to keep it that way. Let's start by holding executives and boards accountable for their successes and failures -- not the taxpayers.

Important Lessons -- Characteristics of Quality Leadership

Having helped many different companies over the years achieve sustained profitability, I have learned some characteristics that ultimately make a superior leader a strong contributor to achieving and accelerating profitability. Below are a few.

  • Demonstrates relentless pursuit of vision and results
  • Consistently exceeds profitability objectives
  • Demonstrates an unyielding commitment to the business
  • Faces tough realities and avoids excuses and rationalization
  • Develops an early-warning system to identify problem areas
  • Acts quickly to overcome problems as they arise
  • Is decisive regardless of popular opinion
  • Is ethical, fair, and consistent
  • Runs leaner than the management team would prefer

I pledge to you that if you act on these directions you will achieve results you may never have thought possible.

At the beginning of the day, it's all about possibilities. At the end of the day, it's all about results.

-- Written by Bob Prosen in Dallas

Prosen is president and CEO of The Prosen Center for Business Advancement, where he shows current and future leaders how to rapidly increase performance, productivity and profit. The Prosen Center delivers the nation's only leadership and mangement training focused exclusively on business execution. that enable them to convert plans into results. Along with being a frequent guest on MSNBC and FOX News, Prosen is the bestselling author of Kiss Theory Good Bye, which gives leaders the tools and step-by-step directions to achieve extraordinary operating and financial results. Prosen earned his B.S. from Texas Tech University, an M.B.A. from Georgia State University and holds postgraduate certifications from MIT, Duke University and The Wharton School.