How Should Pay Be Linked to Performance?

Online forum now CLOSED. Professor Jim Heskett sums up 98 reader responses from around the world. As he concludes, is there another subject as important as this one about which we assume so much and know so little?
by Jim Heskett

Summing Up

Pay for performance: Why do we assume so much and know so little? Pay for performance is an important element of good management, judging from responses to this month's column. The question of what kind of pay for what kind of performance, however, becomes much more complex, suggesting a practice in need of further examination. Taken to an extreme, it leads to a conclusion such as that of Renat Nadyukov: "Sometimes we forget why we pay people." Sivaram Parameswaran concurs, saying, "in the compulsion to stay on par with other players, we lose track of real value and performance."

Generally speaking, respondents favored schemes designed to reward long-term as well as short-term performance, encourage retention, recognize special needs of an organization, be based on the achievement of both financial and non-financial objectives, and in general create value for shareholders. However, there is a sense, expressed by John Ippolito, that there is a lack of perception in boards of directors of "what constitutes 'creating value' in the enterprise … many boards are too ready to turn over the keys to the incoming CEO—then watch the stock price to see if he or she did a good job."

Ashok Malhotra favors "reasonable incentives for short-term performance" and "higher incentives for long-term performance." The rationale, as Mark Evans explains, is that "a CEO must develop and implement strategies that provide long-term sustainable outcomes to the benefit of shareholders." However, Gary Johnson cautions that "Because excitement is so critical to success, pay for performance value can be diminished the longer the time delay for receiving performance pay."

Xu Jian comments that "competitors hire (our employees for their) competence. So beyond paying for (their) performance, why don't we think more about (paying to retain them) for (their) competence?" Pallavi Marathe concurs, saying that "Salary and retention are interlinked these days … (the latter) is also of utmost importance." Jim Chorn asks, "Do you give (mid-range managers) larger incentives in the hope of retaining them?"

Special needs sometimes dictate pay in relation to expected performance. Veronica Serrano suggests that this occurs when "extraordinary performance or major business change is required." Whether this is the case or not, several voiced the need to link pay to both financial and non-financial performance measures. As Ellis Baxter put it, "… sanity is paying for what you want to have done…." Karla Ortega commented that "… a well-structured compensation plan communicates corporate objectives to your employees…."

The perverse effects of pay for performance were also targeted. Sylvia Lee pointed out that "we want knowledge sharing but reward knowledge hoarding." In commenting on executive pay, CEO Nari Kannan noted that CEOs seek "less loss on the downside, more gains on the upside. The company's goals are the (opposite)." Claude Des Rosiers warned that "There are enough challenges to get people in an organization to work together (without compounding the problem by paying for individual performance)."

Ira Kay and Steven Van Putten report, based on extensive data, that they have found a correlation between executive pay and long-term total returns to shareholders. But CEO pay increased substantially even in low-performing firms in their study. Their book represents a useful effort to shed light on the issue. But is there another subject as important as this one about which we assume so much and know so little? How do you explain this? What do you think?

To read more:
Ira T. Kay and Steven Van Putten, Myths and Realities of Executive Pay (Cambridge University Press, due out summer 2007).

Original Article

Two news items caught my eye recently. The first was the report from the Home Depot annual meeting contrasting this year's investor-friendlier tone set by the company's new CEO, Frank Blake, with last year's, led by then-CEO Robert Nardelli. It's hard to tell how much of the investor-friendlier tone was created by the fact that Blake is earning about 70 percent less in base pay than Nardelli, totally aside from the fact that the latter also took home a nine-figure package in incentives. Home Depot's stock has had lackluster performance under both CEOs. But there are those who say that Nardelli's task of leading a transition from a highly decentralized, founder-led organization to one more reliant on shared services and central direction was enormous and that he was making good progress. How much is that worth?

The second item was a report of the decision by Moody's Investors Service to begin taking into account the spread in pay packages between the top two executives in the organizations whose bonds it rates. Presumably, the larger the spread, the lower the bond rating, reflecting the higher implied risk associated with a large spread. As Mark Watson from Moody's put it, "We are rating the company, not the person. A bus might come by and knock the (top) person over."

There are several assumptions implicit in these two items. First, there are limits within which pay can elicit performance. Above a certain amount of incentive, does pay provide an incentive for or even influence performance? The Moody's decision might suggest the assumption that pay reflects value to an organization, and possibly also potential performance. In other words, one's pay in relation to the leader reflects one's value (or even likelihood of being promoted) if the leader were to get hit by a bus today. A third assumption is that good leaders are very hard to find and are worth every penny they are paid, regardless of structural imperfections in the ways that compensation packages are negotiated and determined.

There are a number of reasons why pay may not reflect performance. First, many of the larger pay packages are negotiated by those being hired from outside the organization. Most often, an outside hire is prompted by poor performance by insiders. So in a sense, the bargaining power of the outsider is increased, regardless of the performance that may be delivered later. It is one of several reasons for the careful planning of executive succession. Further, many pay packages are determined on the basis of what others in comparable jobs, regardless of performance, are being paid. This creates a natural disconnect between pay and performance. Third, current pay often reflects past performance, not current or expected performance.

And to what extent does substantial pay for performance elicit short-term decision making that can even exacerbate management turnover? Does it encourage playing the "roller coaster" earnings game, in which executives in an organization can make enormous performance-based incentives in the odd years and none in the even years (ironically, when the large performance-based pay is reported to the public), thus netting a substantial performance bonus while producing little long-term benefits for owners? Is it even fair to ask those lower in the organization, who may be less able to afford it, to put part of their pay package on the line?

If pay is linked to performance, should it be to past, present, or expected performance? Or should pay be linked more closely to past, present, or expected value to the organization? Or are these differences academic? Do cross-company comparisons confuse the matter even further? Just how should pay be linked to performance? What do you think?

To Read More:

The Mark Watson quote is from "The Chatter," The New York Times, May 27, 2007, Section 3, p. 2.
    • Forrest Christian
    • Associate, The Manasclerk Company
    Mark Van Clieaf has been arguing that the problem in comparing pay is knowing what you are comparing. CEO jobs are not all the same: some are bigger jobs than others so comparing them blindly makes no sense.
    • Orgad Barsade
    • Sergeant, IDF
    A salary is the incentive that drives a person to do work in general - work that doesn't directly benefit the worker. In a very basic manner of speaking, if one desires someone else to work for the former's ends, he should logically give the latter at least as much money as the worker could have produced working for his own ends.

    That would be the situation in a very simple system, with a monopoly of one organization on the market. If, however, there are two or more employers, then there is the element of competition, introduced into the system. the employees will have to offer a greater return to the worker if they want him to work for them instead of for the competition.
    Next, we can introduce the element of the nature of the work, where a worker will ask for a larger compensation for harder work, or for work requiring rarer skills, with a high demand and low supply.

    To answer the questions presented here, one could very simply refer to very basic theories of economics, the fundamentals of which i can only guess at, owning but a high-school degree.

    The point, however, of what i'm trying to say here is that pay is determined by a variety of affecting elements and probably always will be, like the price of a product in a free market. One can't ignore one of the elements, for fear of causing unbalance in the market, leading to an economic crash of some kind.
    • Xu Jian
    • HR Manager, Timken Chengdu Plant
    Pay for performance! It's easy to say, but think about these questions: what is the individual performance criteria? Can we properly measure it? Does this individual performance contribute to the organizational goal?

    And, performance actually is a mixing of personal compentence, motivation and the evironment. A bad performer maybe perform perfectly in another organization. What is the difference? Maybe a better culture, maybe a better leader and even maybe a better salary.

    We pay our employees by their performance ranking according to our obeservation and understanding. But how do our competitors hire them from our organization? They do not care about our judgement; they actualy make their decision to hire and offer upon the competence.

    So beyond paying for the performance, why don't we think more about retaining for competence? How? Pay and not only the pay.
    • Raed Al-Adl
    • Student, York University, TO
    I don't think there is a right answer for any of those questions. Past performance sometimes is more related to the team and environment than the person himself, therefore repeating past successes may not turn out to be that easy.

    For the second question, how do we measure value related to the org., is it by how happy the investors are? or by the strategy which sometimes may not push stock prices up?

    Pay should be linked to perforamnce, in my opinion, but we need to develop that magic formula in assessing that performance (percentage of personal contribution and percentage of team related factors) that will affect the bottomline and future growth of the company.

    I don't think cross-company comparison will help much as each company has its internal personality and therefore the person's contribution would differ from one place to another.

    If we develop that lovely formula in assessing the performance, then we should assess the importance of that contribution and measure it financially, without looking at the outside world.

    I believe Winning Leaders will be successful even if we didn't link their pay to their performance; however, investors need justification for those big packages.

    There is always a risk in hiring externally or promoting internally. Companies will be safe if they managed to understand the factors behind past performances and see if those factors are available within their org.
    • Himanshu Singh
    • Senior Analyst, Pipal Research
    At the junior or middle management level it's always easy to link the pay package to the performance. Normally done through well defined (in some organizations though) KRAs or key result areas. In the higher management the question is two-fold: 1. What would incentivize the person to perform better? Pay or something else (share in the company etc.) 2. What is the minimum that should be paid to the person at such level, regardless of the performance?

    Answer to part 1 can be determined while recruiting or promoting the person, based on his record and the interview. For part 2, one has to look at the pay packages of middle management in this company, his peers in the industry etc.

    Once finalized, this pay package, along with the KRAs, should be made public for the shareholders' interests, and all subsequent changes be made public, so that the person himself as well as the shareholders know of it in advance. If both the board and the executive are mature and capable enough there would be no apprehension regarding this policy.
    • Andrew K
    • Officer, US Army
    Based on my experience in the Army, I can say that linking pay with performance is essential. Army officers are not paid and promoted based on their performance - but based on the number of years they have served (at least for the first 10 years of service). While this may appeal to marginal performers, it is a major turnoff to high-performers and leads to low morale. I'm witnessing this first-hand as all of my high-performing colleagues are persuing careers in corporate America.

    As to the question of how best to link pay with performance: each organization can decide for itself the best way to implement this policy. If an organization finds that its employees are manipulating the system by sacrificing long-term performance for short-term performance (and bonuses), then the problem lies with the leaders of that company. In a case such as this, the leaders of the company should begin to reward employees who contribute to the long-term health of the company. Regardless of the method used to implement a performance-based pay system, each organization should ensure that the method used is transparent, fair, and easily understood.

    And as to those who wish to link compensation not with past performance, but with future performance: I think most people will find that the best indicator of future performance is past performance - just as the best indicator of future value is past value. So why not just compensate based on past performance?
    • M.V. Narayanan
    • Change Facilitator, Fine Jewellery Manufacturing Ltd.
    Pay must be linked to expected performance or value to the organization - whichever is higher.
    • Anonymous
    1. Pay linked to past performance is something of a "run of the mill" process. This is quite common in most organizations, and this once-a-year activity makes it look very ordinary.

    2. Pay linked to present performance sounds "little genuine and more like a day-to-day work tracker."

    3. Pay linked to future performance is "Two Faced":
    a. First face being very genuine, the pay is linked to the targets/deadlines that an employee has set himself and [is based on] how one meets and exceeds them.

    b. Second face, as the strategies keep changing in an organization, so do the roles and responsibilities of the employees, particularly in critical positions. This might not present a clear payment reward for an employee, but this will surely test the employee's ability under different circumstances, which might be rewarded over a period of time; and this might not be the right time.

    To conclude, pay does motivate individuals to better their past performance. Therefore, organizations must develop a structured pay-for-performance reward mechanism that is not exactly a cocktail of past, present and future performance, but is also well aligned with the organization's objectives, employee's track record, and leadership potential in those employees who will play a prime role towards the growth of the organization.
    • Anonymous
    You bring up excellent points. Am always thinking of new ideas to bring about change and your article is my inspiration. As a consultant, i've seen a lot of co-workers come and go based on performance. Still, the hiring company loses a lot by paying professionals who are not up to the mark and by the firing and new-hire process.

    Am thinking on the lines of having a pay package that determines how a person be paid on his/her current performance at a new place. Keeping incentives aside - maybe a internal point system which gives the new hirees probably 3 months of pay hikes (totally based on performance)-- which in turn will generate extra efforts and bring about better performance on both sides.
    Maybe a math calculation should be derived from this based on permutations and combinations of test cases. I'd like to see the results of those!
    • Jacob
    • Product specialist, Pharmaceutical marketing
    Dear Sir,
    the perks have to be evaluated with consideration to three values. A cross-company comparison may not be [static]; the operation area may be the same but the vision of the company may be different. The structure and the culture matter a lot.
    • CJ Cullinane
    Compensation should always be determined by performance. A combination of accomplishing set goals, profitability, and company long term strength should be the basic criteria. Stock valuation is a tricky and probably not a good indicator of true value, look at Enron. The emphasis on short term goals unless linked to long term profitability is also tricky and can be influenced by short term bonuses and incentives.

    The pressures on a leader are tied more to stock and stock options than longer term organizational strength. I can see how a CEO would focus on the here and now because they may not be in the job long. If a company's stock is down other criteria can be used, sales, profitability, cash flow, market share. If these are down also the CEO should be terminated.

    I am amazed that a CEO will take enormous amounts of money while the company is sinking. Common sense would dictate sharing the pain but yet they still take more and more. Nobody thought of firing Lee Ioccoca when he took a cut in pay to one dollar at Chrysler! The top people are the leaders, or should be, and no matter how much they signed on for they must bear the burden of their performance! They often say that is 'what another company would pay them' but what if everybody in the organization said that, would the CEO put up with it? They know the risks when they sign on, they should live with the results.
    • Simon Stapleton
    • Principal,
    Performance linked pay is a strong motivation, but only if applied fairly within an organization and meets the expectations of the individual; a hard balance to strike! Expectancy Theory will motivate (according to Victor Vroom) when an employee believes that:

    * putting in more effort will yield better job performance
    * better job performance will lead to organizational rewards, such as an increase in salary or benefits
    * these predicted organizational rewards are valued by the employee in question

    Many schemes fail these tests, and can have an opposite affect of loafing in some circumstances.

    Before establishing a scheme, employers should ensure their HR function is properly trained and is in touch with its employees.
    • Anonymous
    On the whole question of Exec Pay and performance one should look at DuPont. They generally grow their own. Last time I looked they pay very low compared to other large corporations and yet have an instant supply of top Execs in waiting. Their Corporate performance over time has been exemplary. They don't seem to get into the bidding wars for sometimes questionable talent. They build a loyalty to their Corporation by constantly promoting high talent and not keeping talent that is questionable.
    • Anonymous
    Pay-for-performance is currently a point of discussion in health care. To date, the definition of performance seems to be "use of services". In health care, I believe the performance to be measured should be the "appropriateness" of the care/tests/medications provided to the patient. This approach would hopefully encourage professionals and providers to focus on the appropriateness of the care they give and not the earnings which can be obtained.
    • John F. Ippolito
    • Managing Director, Axia Partners
    I think the element that is often missing in linking CEO performance to compensation is an understanding on the part of the board of what constitutes "creating value" in the enterprise. Rather than feeling they know what they need a new CEO to do, I think many boards are too ready to turn over the keys to the incoming CEO - then watch the stock price to see if he or she did a good job. Interestingly, this rarely happens in private equity-owned companies.

    A better solution would have the board defining strategic and operating objectives against which to measure a CEO's performance, taking responsibility for knowing that performance on these dimensions will create shareholder value. These initiatives would be specific, rather than general and incremental (e.g. increase operating profit by 15%) based on a common, clearly communicated vision of where the company must go to be successful. A more capable, engaged board is key to making this work.
    • Dave Siefert
    Compensation addresses current, future and past performance. Compensation improvement adjustments exist to the extent the previous established objectives have been achieved. Secondly, by virtue of past and present performance future performance could be forecasted -- assuming various numerous variables do not change. The link between performance to the organization's objectives are important. Stretch goals and objectives should be established and rewards should be individually as well as team motivating. Lastly, reward systems such as compensation adjustments should reinforce the desired behavior and results that you wish - and wish to replicate.
    • Phil Clark
    • President, Clark & Associates
    Any senior executive or fact...any person who says they can get more somewhere else, should be allowed to go somewhere else. You are dealing with ego, not value. A real leader, with the good of the organization in mind, would never say that. If you have board members parroting those words...remove them. They will drive you into bankruptcy or to poorer performance.

    If you create a performance "system" with formulas and detailed measurements, you have also lost the battle. If you need that to know the value of someone, you are not paying attention, and you should be fired.

    As to executives who have contracts, not tied to performance...don't even utter the words "pay for performance". You are the corporate poster child for those who undermine the importance of quality work and reward.

    Using Wall Street as a measurement of performance is like turning over the election of the next president to American Idol. The schemes and shenanigans used to try and figure out Wall Street are a second industry. How do you tie someone's livelihood to a group that even the Federal Reserve Chairman has a difficult time trying to understand?

    Really figuring out the worth of someone to an organization takes time, personal involvement, and good leadership at all levels. If you are trying to do it with spreadsheets you are in serious trouble.
    • Anonymous
    Why do people still continue to "Run n Hide" and shy their eyes, when you use the words, "pay for performance". These are the people I want to see. Are they not proud of their work, of their contribution to the organization. Do they not feel that they are a valuable part of the whole? Or are they just slacking off, every day waiting till it's time to go home? Even though I am young in age, I am of the old school, of being conscious and accountable of my performance and what I bring to the table, daily. I find that many people are not, but only "gear-up" when someone is "looking" or there is an award or bonus involved. Then they are ALL loudly touting their capabilities. But, are they utilizing them, performing and sharing them with each other? Or are the just giving lip service. No, they again are stingy and self-centered.

    Shame Shame Shame we have lost our Business Pride and Performance ! (It going to the business "hungry" countries - China and India).

    I also agree with Anonymous #9. You hire someone and they don't perform as they say they can. You've lost time and dollars. How to you get that back? You can't. That is why there has to be a "mechanism" or key to performance and goal setting, to show accountability.

    AND not just for the employee but for the Executives as well. If the company does not do well - across the board the Exeuctives should take the biggest hit, not the "general" employee. Upper management always wants the accolades when things are going well but never seems to take the hit when things are going bad, it's always the "general" employee that gets hit with downsizing, department reallocation-offshore.
    • Rowland Freeman
    • Retired
    As a VP at a major aerospace company one half of my pay and all bonus was based on my performance. At the beginning of each year my boss and I negotiated performance targets and they were real stretches. and at the end of the year my performance was evaluated, and my pay adjusted accordingly. That system was a very real incentive to not only work hard, but take extra steps to make sure the subsidiary company i was managing, exceed its performance goals. I was never concerned about the pay or performance of other company executives, nor did I hear such concerns from others. As a consultant I have recommended such a system to health care organizations as wa ay to improve staff performance, and it does.
    • Anonymous
    This discussion seems to be about nothing. And all the wrong questions. Because the questions being asked come up because there is little or no sense to current conditions of pay, incentives, retirements, et al.

    Just as in unions and hierarchical has never been about performance or anything else other than where one is on the pecking order, and usually relating that to what the organization can or is willing to afford. And now Exec pay along with star athletes, pay is about a pecking order in past performance and salaries and an agent who can get more...and who can pay it.

    So the real question we should be concerned with is discovering WHY we do what we do, should we do it, or not, and what alternatives are there. Then we can build a compensation schedule that makes sense. Only performance could be that, that changes the hierarchy, with the lowest level person (who may have more knowledge, i.e., two or three masters or PhD degrees, experience and a special expertise) would be paid more than the person at the helm, who has less, but got that job for other reasons and criteria.

    My sense of the current situation is that consumers make the rules, and the guy at the top is not going to be able to change that, so why are we paying for stars and celebrities? If they want such astronomical salaries, let them start their own Amazon.coms, Googles, and Bank of America.

    Could they do that? I suspect that some of consultants know more about the business than they why not hire them to lead changes needed instead.

    Someone on these responses once suggested the idea of business was to make money. Well, for whom, and why? Answer those questions and perhaps sanity will return.
    • Ellis Baxter
    As our industry (consumer electronics) folds in on itself, we found through much trial and errors (a lot of errors) that a total production format from CEO to Sales to labor paid bi-weekly was the answer. Do the work, make a difference, and we put the money in your hand every two weeks, no salary. As the CEO I draw no salary, only a bonus if we earn it at the end of the year. Hard to do, you bet. Does it make a difference when everyone is responsible for their own production? Well, the numbers speak loudly: revenue up 125%, Free Cash Flow down from 120 days out to 20 days total, and in some cases 60% of the time on the newest reward program down to -8 days. I hold the clients' money until the product arrives and not only earn the interest on the funds but earn a healthy discount for COD terms or CIA of 5 to 10%!

    It is about cash flow. Profits flow easy when you pay cash, purchased right is 75% sold in these days, overhead has been cut by 80%, production per employee is earning 1.25 million per year. Growth is now possible out of free cash flow.

    To answer the discounted knowledge questions, sanity is paying for what you want to have done, revenue, free cash flow, non-discounted knowledge, nitch marketing, and no secret agents.
    • Dan Hays
    • Director, PRTM
    The issue of pay for performance is not so much a question of levels as it is one of good management by the company's management - from the board of directors on down. If pay, whether near-term or long-term, is aimed at motivating behavior, then the guiding principles should be no different than any other measure.

    1) Understand clearly what results you desire;
    2) Understand what benchmark (average) results would be;
    3) Understand the individual's ability to influence results;
    4) Establish clear targets for performance which warrants merit pay;
    5) Ensure that the measurement of results is rock solid.

    The failure of many boards, and indeed managers, is that they allow holes in one or more of the items above. Whether establishing unclear goals, accepting average (or worse) performance as a target, or permitting measurement systems that allow gaming, most performance-based incentive compensation systems that I have seen are inherently flawed.

    In this day and age, it seems that designing and executing such systems should not be so problematic. Perhaps it is weak corporate governance by shareholders (and the mutual funds that dominate holdings) that is allowing this problem to persist!
    • Mark Evans
    • Sims Partners
    The role of the CEO appears to be different in public companies and private companies, however ultimately they are the same and that is delivering value to shareholders. The challenge for the Board representing the shareholders, in determining the motivation for the CEO to achieve the shareholder objectives.

    As John Ippolito of Axia says to often a Board will appoint a CEO and watch the stock price to determine performance. I think the stock price is a element in determining perfomance.

    A CEO must develop and implement stategies that provide long term sustainable outcomes to the benefits of shareholders. Therefore it should follow that an element of remuneration should be linked to longer term outcomes. The challenge then becomes how to measure these objectives.

    A company must also consider the motivation of the incoming CEO. One aspect of that is the age of the appointee. A CEO of say 40 years of age will have a very different attitude to risk than someone more senior in years. This will be because the younger of the 2 candiates will to a degree be building a resume, whereas the older will be planning for retirement. The commonality between the 2 is that they will both expect to be remunerated well for their efforts. It is the responsibility of the Board to determine what the best outcome for the shareholders will be. I think a large proportion of the responsibility for CEO remuneration and performance must rest with the Board and it is up to the Board, as representative of the shareholders, to monitor and evaluate a CEO's perfomrance in accordance with shareholder wishes.
    • Gerald Nanninga
    • VP, Retail Ventures
    A couple of comments:
    1. I worked for a company that went from having financial difficulties to becoming very profitable. In the problem years, the executives took less pay, but were passionate about the business and worked very hard out of a love for what they were doing. Once the company became successful, the pay went up and the offices were filled with people who had less passion for the business and more passion for salaries and having a good resume. And by the way, it was the lower paid executives who turned it around. So I think that too much money can reduce the caliber of of executives, because the "passion" becomes misplaced.

    2. The problem with most pay systems is that employees try to "game" the system to their advantage. One way I have seen to get out of the odd/even year performance is to hold back a significant part of compensation in a pool which gets paid out over three years. If a good year is followed by a bad one, then you do not get the full pay of the good year.

    3. People are like any other asset. If you expect, say, a 7% return on investment on a capital expenditure, why shouldn't you expect something similar on executive pay expenditures?

    4. I was with a group of highly paid top executives once who tried to brag about their pay, but since they all made such astronomically high figures that the relative differences weren't meaningful. As a result, the bragging shifted to how little time they had to spend actually working to make that money. What kind of incentive is that?
    • Gordon K. D. Yen
    • President, APAC Consulting (Taiwan)
    If pay for performance can be applied to government officials as well, people in Taiwan will cheer! Too many news items have been reported on the "extra" fees being abused by both key political party leaders. We need a universal set of measurements and standards.
    • Alejandro Merlo
    • Manager, Nielsen Company
    I have very interesting experiences working based on balaced scorecards or a similar kind of tool. Unfortunately my experience is related to bottom and middle levels, not top levels. I definitely consider that every HR at the organization has to be paid based on its performance; the higher level the HR achieves (close to the strategy), the higher link between performance and compensation. In a way, the top levels are like "the business owners" so they should be paid based on their performance. Here in LatAm, there are just a few companies that work so, even when they are multinational companies operating in the region.
    • Ashok Malhotra
    • Managing Director, Mettler-Toledo India
    I feel strongly that if we push people for higher incentives for short term performances - this is deterimental to the long term interest of organisations. Better is to have reasonbale incentives for short term performances and offer them higher incentives for long term performances - this is win-win since it works well both for organisation and also for individual. Organisation may gain in retention and employees gain in terms of higher stability.
    • pramod
    • chief consultant, Siemens
    Performance of an organization is a result of work done by the whole team (owners, managers, executive & staff). There is a role for everyone in the organization performance. This is true for most organizations in business. A good performance management system, would also have clearly defined organization performance indicators and would have identified good indicators at sub-organization level which are derived from the former.

    In such a system, striving to continuously improve performance requires huge efforts.

    A good solution element which has been proven effective in the whole gamut of performance management, is driving performance by linking it to pay of the performer.

    Further, it is clear we want to improve performance in the short-term AND long-term performance. That means we have to link pay to not only RECENT past performance (short-term), we have to link pay to the indicators which drives improvement in long-term performance i.e. indicators that ensures future performance.

    It is also experienced that not many organizations implement these ideas in a right & objective manner.
    • Pallavi Marathe
    • System Engineer, IBM Global Services, India
    Agreed that there is no general or obvious answer to these questions. There is no correct approach. We are faced with a difficult situation. Salary and retention are interlinked in these days. If employees are unhappy with the increment, they know there is no dearth of people in the market who will pay them more. In such a scenario, the company may be forced to pay more than what is deserved to people for the fear that they will quit. Because hiring new talent has its own costs involved.

    So while linking pay with performance, it has to be kept in mind that employee retention is also of utmost importance. A middle path should be discovered but I wonder if there is one.
    • Yesha
    As per the Compensation Cycle, payment is the monetary reward for the work a person does. Now, this work is to be judged for comparable reward and that is performance.

    Today, everybody is concerned about performance. Hence, pay should be related to performance. For that, such criteria to measure performance are clear and specific to everybody. It is a challenge for an HR person, but again their performance can also be measured.

    And they can also be compensated same way...on the basis of their performance.

    So, there have to be well-defined criteria for each job, benchmarks that define different levels of achievements, and compensation related to it.

    Performance based pay has already played its role, and hence, today salaries are in terms of "X plus Incentive".
    • Satendra
    • Graduate, IIT Bombay
    Surely, pay has to be based on the (overall) performance of the individual. By overall, I mean that it should carry appropriate weights for both past and expected performance.
    I think there can be no MAGIC FORMULA which would work in this specific case as some variables are very corporate (culture and value)defined. For example, if a firm believes in creating trust and also benefitting those who have been trustworthy to the firm for a long time OR in crisis, it would prefer to keep it past performance based. Some firm may like to do it on the basis of the assignment/project assigned to each (expected or present).
    • Mukhtar Yakasai
    • MD, Spring Waters Nigeria Ltd
    I am an advocate of "pay for performance", but what performance - past, present or future? Past performance at the very least indicates the capabilities of the executive to better what he or she has achieved.

    However, it is necessary to make future goals that will attract the desired compensation very clear through measurable key result areas. In determining the KRAs, clear targets must also be agreed the long term future of the firm and not only consideration for short term performance, which unfortunately is what most Boards consider in compensating the top exec.

    Compensation in such circumstance is always better appreciated through a guaranteed pay to the top exec, and a variable component or bonus that is payable on the achievement of the set targets for the present and the future. To guarantee attainment of the organization's goals as well as encourage executives to achieve stretch targets, the variable pay is spread to bonuses for quarterly targets achievements and a jumbo incentive for meeting the annual KRAs.

    It is necessary to ensure that incentives and bonuses paid to executives ensure the sustainability of the firm, hence stock options and other schemes that ensure continued superior performance of the exec should be the options. This ensures the exec continues to perform well as he has a stake may the firm's performance drop. He will fight anything that will suppress performance either from his or his subordinates' perspectives.
    • Ulysses U. Pardey, MBA
    • Managing Director, Am-Tech,S.A. Panama, Rep. of Panama
    Just how should pay be linked to performance?

    If I could choose I would pick up what is the most convenient for me, whether I am the executive or the company.

    I believe this is a realistic assumption on either side.
    The executive can leave but the company stays, this is why it is up to the company to understand what is good for it. Hiring an adequate executive or consultant could mean for the company to know what it really can achieve no matter how competitive the top executive is. Learning about itself in order to understand and assess its feasible business potential in its industry could be a key success factor of a more profitable hiring process. I believe this useful knowledge would help outline a better guidance for the parties involved in a pay-linked-to-performance package.
    Companies as well as individuals have homework to do.
    • Aniruddha M. Godbole
    • Executive Assistant, A.V. Rajwade & Co.
    I think the problem can be split into two parts:
    1. what is the cost of replacing the person?
    2. what is the contribution of that person to the team's (organization's) performance?

    The answer to the first question is purely a matter of demand and supply in the labour market.
    The answer to the second question is about the intrinsic value of the employee.

    What about those who are underpaid in comparison to their performance? This would be true for the vast majority of performers at junior ranks. Here, the answer to the second question is greater than the first.

    In an 'efficient' labour market we could expect both the answers to be identical. And then we would not have a problem. However, as an important prerequisite an efficient labour market would require labour mobility across nations with zero hinderance. Perhaps until then we can simply try to live with different answers to the two questions.
    • Jessica Del Rio
    • Mgr, COmpensation
    Pay should be based on potential and performance. Potential, because when you hire someone, as sophisticated a selection process you have, there is always a chance of the incumbent not meeting the expectations. If it is a current employee, you will also pay based on potential. That I, you pay for a service not yet rendered that potentially will give the organizations the expected results. Merit increase should be based on performance, that is, on the results of the services rendered.

    You pay for potential to attract, and pay for performance to retain.
    • Renat Nadyukov
    Pay for performance is a unique managerial idea inspired by academics, created by managers, used by shareholders and watched by governments. Money is a universal mechanism, everybody loves it and you can always do more with it. Performance is less universal, however it is still a true nature of men to build and create.

    Nevertheless, it can go wrong on: 1. pay (structure & administration), 2. performance (definition and measurement) or 3. future alignment with your organizational goals. There are numerous books, consultants and teaching courses to help you with definitions, measurements and alignments. Why is this topic so hot than? Because sometimes we forget why we pay people. Nowadays you do not pay people only for a job well done. You are not necessarily paying for delivered performance. You compensate them for this. But you pay to keep folks motivated, keep them committed to your course, keep them working even harder for your course (not your competitor?s) and spread the good word to others. You are paying to hedge against risks in the future.

    So pay as motivator is a good and solid idea. However, pay is not the best motivator for long term performance since performance is very individual and money is very universal. Outside of stock markets there is no such thing as a company performance. It consists of performance by all unique individuals the company is made of (voluntarily). So one should treat performance as such and compensate accordingly: based on individual's aspirations and goals but in relation to the complexity and time span of the current task at hand. Each individual's goals and aspirations should be aligned with ones of your organization. If they are not, no money in the world can help you in the long run. You should either hire somebody else or establish a comprehensive internal system to facilitate such co-alignment and intrinsic motivation towards your firm.

    Knowing what your firm is and why you are in business helps a lot as well.
    • Senthil
    • Manager
    Pay to be linked to all three parameters, at the time of negotiation with the past performance, during tenure using the current performance, and based on the company's future growth expectations.
    • Shaiful
    How do we like share bourse?

    All over, the world has developed mechanisms for their corporations to be valued indefinitely and definitely by the open market based on certain fundamentals and events that eventually reflect the up and down of the corporations' share prices.

    Given that imperfect information in the market, I think the performance of the executive is fairly evaluated based on an internal democratic-performance evaluation system. The democracy system is only to allow the company's family members to evaluate their fellow executive performance. I could imagine the prospective system is open concept as is the YouTube concept. From thereon we the market could study the culture, values, and fundamentals on which the corporations are based so that we have a fair and better idea about the company we invest in. Thus, we pay the fellow CEO fairly.

    In regards to human weaknesses that could jeopardise the system, let's let the market decide that too. Don't we think YouTube is an exciting idea in this century?
    • Appolo Goma
    • Warehouse and Outbound Logistics Manager, Oando Energy Services Ltd. Nigeria
    Compensation packages or salaries should generally reflect performance and the value an individual is adding to an organisation. Generally individuals should be compensated for past performance and incentives should be given to encourage individuals that show potential to add value to the organisation in future. The challenge, however, is in getting the basis right for performance measurement in an organisation so that superior performers are rewarded ahead of their peers. If the performance measurement process is faulty, there will be a possibility of rewarding weaker performers and this will be counter-productive to the organisation.

    In summary, pay packanges must be linked to performance but the basis of setting and appraising performance must be well thought-out, and should be objective and merit-driven rather than subjective.
    • Michael Peng
    • Analyst
    When I joined ZTE in 2001, I was one of the very few employees with an American degree and work experience in my product division.

    For some years in ZTE, employees were scored by their supervisors semi-annually. The A-performers had a better chance to get a salary raise or promotion. The C-performers got punished. If they got two "C"s in two semi-annual evaluations in a row, they would be fired. The procedure ZTE learned from GE looked fine, superficially. But my curiosity enabled me to see further.

    After I stayed more than one year in ZTE, I found some C-getters were not low performers at all. I always kept contact with people I worked with and people liked to talk about their work and life issues with me. So I took the initiative to conduct a survey among them and found 5 C-getters, 2 pursuing doctorates and 3 working in multinational telecom companies, and I collected their evaluation experience in ZTE.

    Compared with the open communication policy in the U.S. firms I had worked for, I noticed that there was no upward feedback in the procedure. Because the management knew me, I sent the survey information I collected, my suggestion to guarantee the right of appeal for all the C-performers, and my work experience in Silicon Valley, by e-mail directly to ZTE management.

    Due to my track record, ZTE management took my suggestion seriously and further investigated the issue. In the end, my suggestions were put into practice. My suggestion not only improved HR policies of ZTE to better evaluate employee performance and keep talent but also enabled ZTE management to realize that if they wanted to learn U.S. management practices, they needed to be aware of the context and scenario of the practices and execute them perfectly. Blindly copying American management practices didn't work and may make the situation worse.
    • Sherpa
    A true and successful leader will come to an organization without the personal bonds of monetary greed. They will accept what is offered much in the way that the President and the Pope are compensated. Perhaps this is due to the fact that their "productivity" is measured long after they are no longer CEO. Boards tend to not ask the right questions of the right people when developing their kings.
    • Anonymous
    Our organization, as are many others, is struggling with this topic. I think renumeration should be based on what value you bring to the company.

    This will be a mix of your experience, your current role and responsibilities, and your current level of performance, based on your work plan. The work plan must be a "living document", meaning it is reviewed and adjusted at least monthly throughout the year.

    I would also suggest that if the organization really values your contributions, it should allow you to earn increases in pay, even if you are at the top of the pay scale that has been defined for your current position. I say this as it is a real de-motivator when you have accomplished a lot during the past year, but because you are at the top of the pay scale, your pay is not increased. When this happens, it is easy to feel unappreciated and thus unmotivated to continue to over achieve.

    Thanks for the topic ... some really interesting responses!
    • SSF
    Agree with *Past performance based pay system.
    Items in (#6) excellent. There must be a way for this to be "transparent-fair-easily understood".

    Part of the next step hopefully would include an evaluation tool that would have wide areas like customer response, meeting attendance, company gains/loss, reports. (all in different percentages depending on what is appropriate for each person) and have a share with another employee 30-60 minutes - about your job -(no negatives) so others can get an idea of what you do and you would learn about another's. This is also a percentage that could increase if done.
    • Neville Suzman
    • EMEA Operations, Enable Value
    Performance evaluation is a must, but successful and meaningful evaluation requires a number of infrastructural systems and processes to be set up:

    1) System methodology and application tools to support the Integrity - Application Tools today provide an objective and meaningful support for specifically behavior-based approach, with a hybrid or dual system to include both the qualitative and quantitaive results. This requires extreme commitment from the top/ C level mngt.

    2) Embrace/Leadership - Leaders and specifically C-Level managers must embrace (walk the talk), communicate and promote the true value of the system at all levels of the organization.

    3) Alignment - Top must set strategy (and define the Lead KPI's) and top and bottom must see the "linkage" of the system with results.

    4) Ease of Implementation & Use - The practice has to be blended into everyday business and work conditions.

    When we have the readiness, we can approach with confidence "performance and evaluation" to acheive the results and focus the organization on the path that we have set out to measure.

    Although Perf. Management is not critical to business success in the short-term (which is unfortunately what we spend most of our efforts measuring), it is most critical to ENABLE VALUE to businesses to achieve sustained performance, quality and results.

    We have been working with the Hybrid Model for a few years now, and linking pay to performance (and reviewing outcomes) in EMEA -- what works best is the Hybrid model impacting both qualitative (behaviors, processes & competencies) and quantitative results for members, teams and the organization.

    The key to projects lies in the commitment (buy-in) at the TOP, together with a Performance Dashboard and Management Tool that enables the Hybrid Approach for organizations.
    • Sylvia Lee
    • Managing Partner, Performance Partners Inc. Edmonton, Alberta
    There's some really intriguing discussions here, particularly around the issue of past performance predicting future performance and the relationship between and among performance, environment, culture, etc. In reality, no person, regardless of rank, achieves high peformance on their own--performance is ALWAYS a collaborative effort.

    I once worked in an organization in which the top leader earned twice as much in compensation as the next person "down" and then received a bonus that equalled 50% of her pay because we, as a TEAM, consistently achieved high performance that generated high profits. No other employee received any bonus, so when the boss's bonus became known, that was a major disincentive. The boss's efforts to cut costs, including refusing salary increases, became seen as directly linked to "less profit = less bonus for me" and it probably was a real link. The culture thus created lower performers which, in turn, affected profits.

    But the larger question is not so much should pay be linked to performance as what constitutes performance, as several respondents have pointed out. When I work with clients I often get them talking about business as a system, with the traditional business model being inputs (people, resources, etc.), process (creating and delivering the product or service), outputs (profits), and feedback (customer satisfaction).

    Then we talk about the culture that the output of profit creates, and the conflicting priorities that creates for managers--one to generate profit, and two to create satisfied customers. If you draw out the cycle you will see that the second priority is at right angles to the first--the manager is being pulled in two directions.

    But what if you change the cycle? What if you make satisfied customers the output and profits as the feedback? This has all kinds of implications. It turns "creating shareholder value" into meaning happy customers who keep paying money for goods and/or services, rather than the money itself. It creates a culture of customer service in the organization. Managers now have aligned priorities - happy customers that pay enough to generate profits.

    This now creates an interesting basis for measuring performance, because it is much easier to determine how an employee (at any level) contributed towards creating and keeping happy customers than it is to put a dollar value on that contribution. I'm not naive enough to think that this should be the only measure used, of course, but it can certainly help change mindsets about what is important in a company.

    Another aspect, also related to culture, is the concept of a collaborative, knowledge-sharing culture. As we all know, we want knowledge sharing but reward knowledge hoarding. So perhaps building accountability for knowledge sharing into accountability agreements (as opposed to mere peformance agreements!) can form another piece of the "measuring performance" pie.

    Finally, I couldn't agree more with those respondents who refer to leaders performing well because of passion and values and other non-measurable characteristics. Abraham Maslow figured that one out a long time ago, labelling survival and safety as absolute needs which can be addressed with money, and the remaining needs in his hierarchy as relative needs that cannot, long term, be address with money. It comes back to culture, I believe--what is the PURPOSE of the organization, as opposed to its mission, and how do employees buy in to that purpose.

    I recently had a discussion with a client that makes flame-resistant clothing. Their mission statement, as with most organizations, was all about them - being # 1, etc. It took about half-an-hour with the senior management team for them to generate the idea that their real purpose was not making the clothing but to save lives and reduce injuries--the clothing was the how, not the why. That came back to their mission statement and the realization that it should be about the customers, not about them. And that generated discussion about fostering high performance, particularly around quality, in employees. Low performance (low quality products) can cost lives. Interesting dynamic! The people on the cutting and sewing floors and earning minimal wages, can relate to that a whole lot more than to company profits!
    • Prasad
    Pay matters only for the first six months. It is the incentives above the pay that will determine the sustainability of the people.

    Incentives can be in any form; however, incentives should be appreciated by the receiver.

    I received expensive (I guess ivory) chop sticks. But what is the use, I don't know how to eat with chop sticks. In this case, the incentive, although expensive, did not satisfy my expectation level.

    In conclusion, along with the pay, understanding the receiver's expectation level and rewarding accordingly will lead to satisfaction and thus sustainability.
    • Jonathan
    • Student
    I believe there should be an average of 60% that should stay the same every month and 40% which are related to the performance. The performance is not always due to the worker's abilities. It depends on the global situation.
    • Sergey Mirkin
    • In-between Jobs,
    It seems like these talks always miss one key point: globalization. In this global economy one should no longer be paid based on past salary or similar concepts. Companies are global and just because standards of living (and rent fees) still differentiate broadly, the products are still sold on the same markets. Instead an executive's pay should be closely linked to market capital of the company and to the changes expected from the leader.

    Now linking pay to market capital is easy; however, how should companies decide on the second part? Well, how about keeping two systems: one would be based on overall growth of the market capital (i.e. stock) and the second would be based upon delivery on goals preset by employees. And whereas in ordinary circumstances there is a huge lag to reward/punish the leader, in this system the paycheck feedback is immediate. Consider the following:

    * The company hires a new CEO to bring positive spirit into its corporate environment: Although financial gains might not be immediate, the CEO is rewarded immediately based on insider evaluation (and their predetermined goals)

    * A corporation with a "small capital" hires (from a bigger company) an established industry veteran to help its progress: Although the direct pay for leading the company with a smaller capital is low, the upside of improving the company brings higher rewards. Thus they don't have to pay higher fees just because there is something bigger/better the new CEO could do.
    • Chris Vaagt
    • Managing Partner, Vaagt & Partner
    I found this amazing. Pay is a hygiene-factor, according to Herzberg: above the minimum level necessary to recruit somebody to this position, money does not motivate anymore. It is, at most, a status factor, and in societies where money is in important social differentiator, like in investment banking, earning a lot of money seems socially important. In general, my observation is that it does not motivate good performance, but is rather paid for the hope of future performance, so it says more about the firm hiring than about the individual being hired.
    • Paula Thornton
    • Experience Design Strategist, EDS
    1. Is the question about executives or individual contributors? They're two totally different conversations.

    2. For executives: follow the evidence. Make it a matter of metrics. Someone could make a bundle signing contracts with Executive Boards just with the industry analytics on this ... salaries compared to company failure, salaries compared to customer satisfaction, salaries comparied to stock price. Then pull a weighting across all the factors to assess sweet spots by some other factor (industry, size of company, breadth of competition, etc.)

    3. For individual contributors: depends on what the business strategy is. ELIMINATE all pay for performance ... they do not work (it's a political shell game). Beyond that, engage the "long tail" of resources. Open competitions (for thought, etc.) with dollar values aligned -- that's pay for performance (e.g.
    • Surendra S. Arya
    • GM (Quality)/ Prog Dir People CMM Initiative, R Systems International
    How do we think about it?

    People need to be paid for:
    - Demonstrated performance against goals/targets set by management/ organization including team performance (Past & Present)
    - Potential (Future investment)
    - Extra ordinary achievement not defined as a goal/target (Past & Present)
    - Competency growth (Future investment)
    - Contribution to organizational intiatives (Past & Present)
    - Business contribution/ criticality (Past & Present)

    The structure of the compensation package and relative weightages for the above factors may vary from org to org. There may also be graduated weightage for different roles/ senior positions in the organization.
    • Haresh Chugani
    • Asst. General Manager - Sales & Mktg, Cellebrum
    50% on industry standard based on years of relevent experience - This is to be in par with the open industry standard and avoid huge gaps.

    25% on flexible - on his value to the organization
    - this percentate should be increased depending on the seniority of the position in the organization, also based on best judgement of past history (by reducing the % mentioned in above point of the industry standard).

    25% on negotiating power of the new joinee.

    I firmly believe that the above formula shall take care of the employee, organization interest, and external factors put together.
    • Sivaram Parameswaran
    It sure is an intriguing discussion and to me, there is no question that pay has to be in synergy with performance and the lack of equity is what constitutes the basis for many of the difficulties in retaining good talents. Nothing motivates more than seeing yourself rewarded commensurate to your performance and even as per Maslow's hierarchy of needs, safety and survival come much ahead of self actualization.

    Having said that, what makes the issue even more trivial is in the unequivocal definition of performance and value across the organization, the best and equitable way to measure performance and how individual performance in turn maps into the organization's performance.

    Most of the time, any individual's pay is very much relative, be it within the firm or with the competition outside, irrespective of his performance and value add the individual brings into the firm. The inherent inability to nurture high performing individuals within the system forces us to look outside for talent. And this results in payout anomalies across the firm. External influences and peer pressure do play a significant role in causing these anomalies, where, in the compulsion to stay on par with other players, we lose track of real value and performance.
    • Karla Ortega
    • Purchasing Assistant, EFTEC-PLACOSA
    It is necessary to ensure that incentives and bonuses paid to employees ensure the sustainability of the firm, and how are we going to make that it happens? Aligning the organization's objectives against wich to measure the employees performance directly that's how the company must go to be succesful. The link between performance to the organization's objectives is the most important, to create value in the organization. Accurately measuring and rewarding performance is a key to driving the desired behaviour from the employees; so a well structurated compensation plan communicates corporative objectives to your employees force; while a poorly structured compensation program can actually incent employees to work against coporate goal.

    The pay should be linked to performance; in my opinion the performance evaluation and reward systems have multiple objectives, not all of which are directly related to the motivational issues; for example, incentive plans may be designed to attract and maintain key personnel. Plans can be use to control compensation costs or make pay more variable with firm financial performance, there by shifting financial risk from the company to the employees. Reward systems linked to the performance can help foster a desired organizational change by communicating new organizational goals.
    • Veronica D. Serrano
    • Vice-President, Mt. Zion (Phils.)
    For the most part, pay has to be totally linked with performance. This ensures workers of fair recompense. Still, performance cannot be the sole determinant of any remuneration package. In the real world, practical measures have to come into play. Pay schemes will always take into account business realities such as practicality or affordability, industry averages, supply and demand of skills/scarcity of labor, sophistication of functions/responsibilities, skills levels, competition, etc. Worker's pay has to be rationalized against a gamut of factors. However, to attract, maintain, retain talent necessitates the need to use performance as the most important measure for compensating people, provided, of course that the critical factors for measuring performance have been identified, understood and agreed to.

    As to preferences in the time dimension of linking pay to performance - be it past, present or future - will depend on the objectives of the organization and the demands from the position. Naturally, past performance can be used to determine base pay or maintenance level compensation. Present performance can be utilized to determine perks and incentives with the end goal of retention and motivation. Linking pay to expected performance may be applicable when extraordinary performance or major business change is required. Again, what is most essential is that the standards are well thought of to benefit both the organization and the individual. Tough job, indeed, for the HR group!
    • John Cockerill
    • President, Exquisite Heat
    Top pay is based on the pay history of the job. The candidates are hired on the hope that past performance will bring accumulated value added to the decision making quality of the company. The risk is certain. You never know for the first six months if the potential will show fruit. The big pay packages are for the personal security of the candidate. Why else shold they make the move. The Board of directors is not that concerned by the money. If they are in love with the candidate the price will be flexible to the candidates history and job history in the company. If at the end of the contract or probationary time the job goes south, no one gets hurt as the money is there to pay for the correction. Then the Board starts over. I am more loyal to promotion from within. You should bring the best talent in at the middle and let the cream rise to the top. Most important is for management to develop and let the cream rise to the top before it sours. Not every honeymoon makes a marriage.
    • Adhiraj Dey
    • Head Human Resources, BMB Heart Research Centre
    Performance is Brain and Energy and this is justified by the outcome which is directly linked with the productivity linkage of the buisness, culture and growth. Hence one is paid for the performance.

    Peformance is not only skill and monetary gain, it is also measured in terms of:

    1. Personality (impact on colleagues)
    2. Knowledge
    3. Culture
    4. Behaviour
    5. Leadership
    6. Family background (blue blood) what he/she inherits from the family generation.

    To measure performance is not an easy task, it need lots of thinking and rationality to satisfy a performing employee of the organization, specially in the upper hierarchy level.
    • Gaurav Goel
    • PGPX - II, IIM Ahmedabad
    The goal of compensation and other personnel policies should be to encourage employees, at each level, to work towards company's long term strategy. The biggest challenge is to identify measurable parameters that indicate congruence of one's efforts (and achieved results) with the organizational goals. Many times there are conflicts between short term gains and long term sustainability of profits. If pay structure is not designed properly then it can lead to negligence on part of managers towards long term goals in favor of short term gains.

    An organization can share its success with executives in form of bonuses linked with company performance but these should be separate components from the individual performance bonuses. The variable pay structure should reward/penalize top managers only for the decisions that are in their control and not for factors that are out of their control. An executive's decisions should be evaluated after discounting for the Macro economic factors that might have affected a company's performance.
    • Charles Carroll
    • consultant, independent
    This topic is too broad to be handled as one category. This comment refers to individual contributors and low to mid-level managers.

    1. Base incentive pay/bonus on performance of organization, local business or organizational unit and personal. a) Organization component is almost symbolic so make it 10-15% of incentive. b) Business unit or team is something the person can affect and there is a desire to generate cooperation and reduce selfishness so make it 30-35% of incentive. c) Personal achievment of goals winds up with 50-60% of incentive.

    2. Goals must be achievable, stretch but realistic, and subject to revision if the organization changes course through no fault of the individual. Periodic achievement measures may be a partial solution to this along with goals using quarterly, semi-annual and annual periods.
    • Pradipta Saha
    The point that should be taken into consideration in in terms of CEO compensation is the pressure on them or the onus on them to deliver. It is the CEO who lets everyone just focus on the defined work given to them. The tension of generating profits in uncertain and fluid terrain is not to be understated. People who have the ablity to be the final responsible authority deserve careful consideration.
    • Nari Kannan
    • CEO, Ajira Technologies, Inc.
    There is nothing wrong with Paying for Performance. That's the best way to reward top executives, not just the CEO. In private companies as well as public companies it is often the intangibles that a CEO or a top management team brings to the table that makes the difference; courage, foresight, a propensity to action, inspire and lead people.

    The trick is in designing it properly. The only yardsticks you have when you design a pay package for a top person is their past performance. However, the company needs to design the pay package in such a way that if performance is lacking, then the severance is quick and does not reward failure. Of course, the person being hired will always make sure that if their performance is not good and they are fired, their severance is substantial. If their performance is good , they will make sure that they are rewarded amply.
    Less loss on downside, more gains on the upside. The company's goals are the other way.

    Of course, all of this means that the compensation committees are having the best interest of their companies at heart. This will not happen if CEOs are all on each other companies' compensation committees. So for this to work properly first do some navel gazing and reform your compensation committee. Then do the structuring of the pay packets.

    High profile candidates will always end up negotiating pay packages that are in their favor. In those cases, it is better to bet on lower profile CEOs or top management team members that have immense potential but are not that well known already.
    • Ashraf Iqbal
    • Director, MindSpring Sdn Bhd
    This is one of the more serious issues that countries like Malaysia are undergoing. As privatization has proven not to be the solution to government-run bureaucracies, a significant number of government linked company GLC's are being put under capitalist style reform. And of course Pay at the Top is an issue.

    a. talent is scarce, more so when affirmative action is in place;
    b. the typical pay lines of privatized firms are significantly skewed in favor of fixed remunerations and high benefits, which do make them market competitive in pay but not in performance;
    c. the risks of taking these top jobs are so high that the package has to be substantial enough for one to take the risk. Malaysia is such a small country that if one fails as a GLC CEO, one can kiss his/her career goodbye.

    Having said the above, I don't think the fundamental issue of how to link pay to performance is any different, anywhere in the world.

    Specifically for CEO's, my job is to ensure that they produce success. And the size of the paycheck is no predictor of success.

    So, I have only 3 rules when dealing with the subject:

    a: I would pay the most for a person who has the track record of successfully leading another organization in a similar situation. This pay rate defines my 100% payline.

    b: The person must go on a fixed to at risk ratio of 60 - 60: which means if base is to be 1 million, he gets a fixed of 600K, and for on-target performance another 600K. That fixed portion must not be any more than his current fixed if he is an outsider.

    c: of all the people in the organization, the CEO is the last to get paid out of the Bonus pool, meaning that he must focus on ensuring the pool is large enough to pay out everyone before himself. To pursue team alignment and ensure that everyone is in the same boat, I run 1 single bonus pool that allocates out to groups of employees including the leadership team and CEO.

    (BTW targets are all computed on EVA basis.)
    • Jim Wohlleb
    • Statistician, Little Rock School District
    The paucity of empirically based opinion and specific formulas of performance pay in this exchange impress me. Have the writers measured results of alternative compensation arrangements and compared them?

    Performance pay in public education is currently hotly debated, and some experimentation has been going on. Most appears to lack sound design and believable results. A great challenge and common objection is reduction of the basis for reward on a single measure, despite widespread recognition of many desirable results of education. Some examples of specific schemes and their concrete results might further this debate.
    • Claude Des Rosiers
    • Vice President, Boone Plumbing & Heating Supply Inc.
    In reference to Pay for Performance. Just watch out for what you wish for, you might just get that, at the expense of promoting a Silo mentality. There are enough challenges to get people in an organisattion to work together. The breakthroughs in a company happen in the space between two department or business units and are always a result of people working together to achieve excellence.

    I believe more in a profit sharing plan in which we all work towards a common goal, with some mechanism build in to recognize with a extra % of profit sharing dollars [for] breakthroughs which result from the actions of specific persons or groups working together that have achieved significant results that affect the company's overall results or contributed to long term goals.
    • Anonymous
    Baseball Guru Bill James, in an effort to start and end all arguments about player value, devised a system called Win Shares (WS). WS attempts to tie wins to the statistics and performances thay created them, thereby eliminating various confusing factors (park effects, league effects) and allow people to compare players across eras. It's not exactly perfect, but it's very slick. The most important thing is, it's a noble attempt to capture what matters.

    Oh, and maybe we can take the thinking forward to performance based pay schemes. Define your metrics (ROI, stock price, any other metrics you choose). Figure your total "wins," and make a noble attempt to find your MVPs.

    That said, when you get a CEO, you should be getting the equivalent of a top partner at a consulting firm, a top partner at an investment bank and a junior partner at a law firm. So, figure some pay scheme that matches a year of time from each, and there's CEO pay, base and incentives. Nice. Easy. And you are getting what you pay for. Current salaries are likely too large to allow any bonus to provide any marginal incentive power. What's the marginal utility of an extra million or two to someone who is already a several times over multimillionaire? Not very high.
    • Deepak Alse
    • Project Leader, Wipro Technologies
    Pay for any leadership position (CEO included) has to include

    1. Risk Pay - Dependent on the level of risk the individual is expected to lead through. This should be the smallest part of the payment...A large risk pay indicates a lack of confidence in the leader's ability to deal with the risk.It should be the base cost of opportunity at the point of entry of a leader into the team.

    2. Potential & Talent Pay - Capability on scales of talent measurement relevant to the direction or strategy the organisation expects the leader to lead through.Based on past as well as ongoing performance in similar and dissimilar circumstances.

    3. Inspiration Pay - A measured proportional element (market cap/profitability) between status quo and the position the leader is expected to lead the organisation to!

    The board needs to evaluate the uniqueness of the scenario and determine the proportionate pay. The CEO pay is an investment and the rules of ROI apply to CEO pay too! I'd expect my CEO to be an intraprenuer, someone whose base payments are enough to lead a life commensurate with his or her achievements till date, someone who has the amount of faith and confidence in the capabilities required to earn other rewards through ongoing performance! At the end of the day, any CEO whose pay undermines his firm's value(cash, goodwill or market cap) is probably not worth the pay!
    • Julie Zinn
    • Business Skills Program Director, ESI International
    A pay for performance model should be inextricably linked to an employee's potential based on set of essential business skills. Executives on the continuum of experience, from junior to C-level, may or may not possess the right "soft skills" for optimum performance in business. Critical thinking and problem solving, high-impact communication, financial acumen and behavioral coaching are just a few examples of required business skills that leaders at the executive level must possess to reach the pinnacle of their performance potential. Pay for performance potential is a worthwhile model for many businesses in the professional services industry, so long as the right sets of previously determined required skills are clearly stated expectations. Possession of essential business skills helps to sustain performance in the future.
    • Jim Chorn
    • President, A-Gem Software, Inc.
    Pay for performance will always be very subjective especially for mid-range management positions. Consider trying to compare managers in charge of QA with those in charge of design efforts at the same level of management. They just aren't apples to apples and without one the other suffers. Then factor in "cost of living" pay adjustments just to hire good people from more costly geographical areas. The local managers tend to become more valuable simply because their pay hasn't increased with the new hires. Do you give them larger incentives in the hope of retaining them? Sometimes new blood is the way to go, but organization change must be accounted for when determining merit increases. It makes perfect sense to give an under-achiever incentives simply to stick it through tough times but you don't make a habit of it.
    • Gareth
    • Consultant
    What is the alternative? Pay for years of service or paper qualifications or some other unionised system? Surely not.

    The key like many others have said already is to design a performance measurement framework that truly relates to the highest level of the business outcomes and then fairly measure the contribution of everyone regardless of the position. This is easier said than done but it is the ongoing challenge for leadership to understand what is really happening in and around the business and then manage pay and other variables accordingly.
    • Bernard Sia
    • Project Manager, iPerintis, Malaysia
    If you draw a Venn Diagram consisting of "market forces/demand," "On the Job Performance" & "Company Earnings," the quadrant's intersections make up the right pay for the right executive.

    Why the right executive? Because I personally believe that pay, as suggested by Mr. Heskett, can impact performance; and the individual a.k.a human capital, is every bit a unique investment that requires tender care and growth. The individualistic psychological factors vary between cultural upbringing and Maslowian motivational influences and goals. For example, some personnel may choose to limit his performance for one reason or another. Secondly, the organization's transparency in determining pay packages defines the trust climate of the company and the proverbial glass ceiling which ultimately influences performance.

    To channel and muster individuals into an army of purpose driven executives, the organization requires goals that are far larger than monetary motivations; indeed, we are cautiously reminded of an Enron-like outcome.

    I go by an advice from a retired CEO, "If you love what you do, naturally persistent and productive; money will come before you even realize it."
    • Margie
    • Lecturer, BK School of Busines Management
    I think that in spite of popularity of everything "strategic", the USA remains short-term oriented when it comes to CEO compensation. Tying it to the market value of shares makes the CEOs myopic.

    In my opinion, a CEO has significant influence in making the future of the company and doing things that affect important issues that affect the interests of society--apart from the lucre and glamour of the stock ops and profit sharing, of course.

    So, why not tie the CEO rewards partly to the extent to which the CEO took pioneering/effective steps towards managing critical issues such as green performance of the company? In less well-off countries, there are many issues that the government alone cannot manage--such as serving the population at the bottom of the pyramid, for example.

    Thus, the difference/ADVANCES made by the CEO in the area of social responsibility, ethical conduct, corporate governance should also be considered in deciding the CEO compensation.
    • Manisha Kandoi
    • MBA Student, PICT- SITM, pune
    Pay is decided on the basis of competition. Top management has to be high on the performance scale, so in many MNCs the chunk of compensation is incentive-based according to performance, so that the top management drives overall performance.

    But in my opinion this method of compensation undermines various vital issues likes years of association with the organisation, crisis management, creativity and innovation, etc. Also, the brand associated with the personality which accelerates the confidence of shareholders is of paramount importance and should be accounted for (e.g., Asim Premji, Anu Aga, Kiran Mazumdar).
    • Gary Johnson
    • President, Gap Solutions
    Pay for performance as with any other pay incentive is intended to produce specific results; results that the recipient through using their individual talents and abilities should have control in helping to achieve. The critical success factors with incentives are to keep the excitement alive and the individual focused on doing the activities that drive to the desired result. Because excitement is so critical to success, pay for performance value can be diminished the longer the time delay for receiving performance pay. Just tell your kids the family is going to Disney World in three months and see how long their excitement lasts. Now add in periodic videos, posters, a calendar to check off the days, and other aids, to help keep their excitement alive. Adults are no different. We too need excitement and focus on doing the right things to keep our incentive opportunity alive in our hearts and minds. So, if pay for performance or any
    other incentive, is to produce the desired results it must be a living incentive reminding what is ahead when the result is achieved. A combination of quarterly and annual payouts over the more common one payout annually can be more effective in achieving the end goal. Also, with the revitalization of team based goals, a team incentive is worthy of consideration; all win or all lose but they do it together, and an exciting thing which occurs is that the team members help each other keep the excitement alive and focused on doing the activities that will produce the desired result.
    • Vikas Chadha
    • Head Finance, Kaya Skin Care Ltd
    Competitivness between companies has been increasing exponentially, and for companies to be able to rise to the new age it is critical that their resources fire on all cylinders. Human resources and their motivation can be enhanced through sharing of profits and making each employee a partner in the company's endeavour to be No. 1.

    Incentives and profit sharing lead to such highly motivated behaviour and differentiate an excellent performer from the moderates.
    • Vijaya Ramam
    • consultant - hospital management, l.V. Prasad Eye Institute, Hyderabad
    As many before me have commented, I would also add to whether we can really measure performance and link the pay. I have seen as head of administration in the health care industry those who left to graze at greener pastures who then returned with the same old salary, as they did not get job satisfaction [elsewhere]. Most of them very often said that they could not adjust to a different environment/culture that was not very conducive.

    I would say that it is the ultimate satisfaction that counts at the end. Very often I try to motivate my disgruntled colleagues to continue doing their best without any compromises, and to reach the organisational goals, which will definitely yield results sometime or other. Since time immemorial, an organisation would definitely like to reward a committed employee who contributed for the growth of the organisation.
    • Kapil Sopory
    • Company Secretary, SMEC (India) Private Limited
    Before we link pay to performance, we have to be crystal clear as to what is expected of the executive during the year; physical as well as financial targets have got to be identified along with the resources--manpower, monetary, and infrastructural--considered necessary to achieve the results mutually agreed to at the outset.

    On the top of it, CEOs and other top management must have adequate discretion to operate flexibly; and only very serious actions should be questioned and that too very rarely.

    Once this is done, there needs to be a system of periodic (say daily, weekly, fortnightly, monthly as needed) review of actual results and due cognisance placed on situational external factors that were beyond
    the control of the executive during the period and that led to negative results, if at all. In-depth discussions help to evolve correctives.

    While the above may look somewhat theoretical, it is in fact not so. However, with so many recurring demands day in and day out, the need for such a mechanism falls out of sight. This leads to subjective decision making when it comes to reviewing remuneration at the end of the year.

    Yes, CEOs have complex and onerous responsibilities for which their planning and leadership qualities play a key role. Their performance is, therefore, multifaceted and their impact on the company as a whole needs to be critically appreciated by the Board.

    The crux of the matter is objectivity and transparency as these lead to somewhat of a proper linkage between performance and pay.

    One thing more, a new entrant's past performance will willy-nilly have to form the guiding factor for fixing his or her pay, but his or her performance has got to be closely watched right from day one in order to ensure that his or her past record was not window-dressed.
    • Dr. S. Banerji
    • Independent Consultant
    The Catholic Church, the Ramakrishna Mission in India, Tibetan refugees under His Holiness the Dalai Lama, and local chapters of the Bohra Muslims are striking examples of durable leadership from outside of the commercial world. The current Prime Minister of India is also a telling example of top quality administrative leadership that has almost nothing to do with material compensation.

    It is naive to imagine that organizational excellence is an individual affair. However, it is even more facetious to imagine that capable individuals of integrity need extravagant and virtually limitless remuneration in order to be persuaded to stay in their jobs.
    • Richard N. Meyer
    • Principal, Business Designs & Strategies
    In nearly all organizations, measurable metrics for success are established for staff exclusive of CEOs. Why not (either by shareholder group, board, or other means) establish similar, actionable and monitored metrics for success for CEOs?
    • Jack Harshberger
    • Consultant
    With all the books available and concepts about incenting for performance, it seems we continue to miss the mark on what is important about measuring performance. It's a sad fact that pay is not an award for a job well done. Most rank and file, at any level, see executive pay as a benchmark for corporate leaders, not always due to clear results. Their pay and benefits, however, is targeted to some comp range or to the old paradigm of we did or did not have a good year last year or ytd.

    If real "hard number" measurable goals(ROI) were set and met similar to the day to day expectations for net-net business units, there would be an improved acceptance of executive pay levels because the ripple effect would carry over real results at the lower levels.
    • Charles Carroll, PMP
    • consultant, independent
    If organizations do not want short-horizon decisions, then some part of reward-compensation must be based on long-term results. To effect this, the reward must be large enough to be worth the wait (the individual is getting agreed-upon compensation during this time). It can be staggered to provide mid-range goals and rewards with the greatest reward being earned for the longest-term results (such as increased market share, reduced operating costs, reduced staff turnover, etc.) Since it is to be in the future, it must be "iron-clad;" contractual and legally enforceable and based on objective, verifiable metrics. Could unforeseen events sabotage contracted success criteria? Yes, but then that is a normal part of life which affects base pay, continuity, and every other aspect of employment.
    • Anonymous
    I would consider the issue here to be what the incoming CEO would bring to the table. I think that the person needs to clearly understand their position and the expectations of the Board of Directors. I think this link is what faulters most in the US.

    Company leaders are graded here on experience but experience as good of a trait that it is, needs academic underpinnings. If pay packages were also linked to academic backgrounds, I believe those packages would fit more in line with those individuals as we as stakeholders believe they should perform. Take Europe: many top executives hold doctorate degrees, and in the US we are lucky if the CEO has a Bachelor degree. And we wonder why European nations possess a more sustainable reputation amongst their workforce.
    • jim sellner, PhD., Dip.C.
    • Co-Owner, ViRTUS
    In my book, Leadership for Einsteins, or in this context i suppose, Performance for Einsteins, P = MC3.
    Performance is a function of Motivation, times Competence, times Congratulations, times Cash.

    And it's all relative (sic).

    All of these factors, in my view, influence performance. And since everyone is human, human principles apply - even to CEOs.

    So, influencing and rewarding performance requires fierce conversations, infused with candor, and negotiation about what is expected - What is "The Deal" we are creating here? - This is what we are offering. This is what we expect in return. Does that work for you? Are we clear about the consequences on both sides? If anything changes that might affect "The Deal" we will keep each other informed. Now let's go get the job done.
    • Girish Shah
    • President, Agile Business Consultants
    Paying for Performance is certainly an important factor for motivation ... not only for the individuals, but is even more important for the organizations. A widely perceived UNFAIR pay for poor performance (e.g. Home Depot scenario) created low morale and a feeling of negativity, as observed by talking with several employees at their stores.

    Visible performance is most evident in the field of sports - individual or team sports. If we believe that star performance of a sprinter is solely due to him or her, we are sorely mistaken. The strength coach, the technique coach, the nutritional coach etc. all contribute to the performance of the athlete. Same is true of team sports - a Steve Nash or Michael Jordan performs well when the rest of the team and various coaches contribute to their efforts.

    In general for most businesses, except for the lowest level individual contributors, engaged in more of a repetitive routine activity, it is extremely difficult to establish measures of performance that have a meaningful one to one correlation between results, efforts, and individual's performance / contribution to those results.

    If we believe that in today's highly competitive business, the organizational performance and results are more due to teamwork, then much more attention needs to be paid to establishing the performance standards. Generally lopsided standards, lead to lopsided behavior - especially the propensity for greed rise with rise in levels of management - exceptions prove the rule.

    It will be interesting to know the relationship between average hourly compensation (gross including monetized value of bonuses, stock options, incentives, perks, and salary) of top 3% of the organization and the other 97% of employees. It could throw light on emphasis for teamwork and compensating for team performance.
    • Jacqueline Barnett
    • Consultant, BSEI
    There are many good examples in sales force compensation, where there is a baseline salary, plus commission on sales made, plus bonus for individual and team performance. For executives, the pay for performance should be based on the same things - baseline salary and whatever perks based on previous performance, but not in the stratosphere. The primary performance pay and incentive should be based on actual performance achieved with the company - never anticipated performance.
    • Motty Perel
    As critical the quality of its CEO is for an organization, the organization should start with producing an excited and enthusiastic work team.

    How to start that team? By asking the question, "Why is an entrepreneur doing his best for his business, while an employee?s positive effort toward the business needs to be induced by his employer?" After all, no one doubts that an entrepreneur is doing his best for his business. The question is only WHY.

    I came to the conclusion that it is because, in contrast to an employee, an entrepreneur does not sell his labour for a wage, but instead, he invests his labour in the market for personal profit.

    If so, then why not let the employee do the same, i.e. why not pay an employee a competitive wage, and if his team's effort generates profit for the production unit (for which the profit can be calculated or closely related to the profit level of a larger unit, say, a production plant, a placement office or a mine) this profit, in proportion to the worker's wage, would be added (or subtracted if the profit is negative) to his wage. That means, the profit level of the production unit and the profit of a worker on his wage for a given time period is the same fraction, or percentage. Now the worker is not an employee any more, he is an entrepreneur. He is as enthused about the employer?s profitability as is the employer himself and as the whole team is.

    Such an enterprise is flexible to market requirements. It is easily managed and a pleasure to lead. The leader must not be a seasoned professional with a successful record of holding an organization on a short leash. A young and intelligent graduate will do. A young and intelligent graduate will be attracted to such an organization because it is most likely to succeed, which will produce an attractive record for the young CEO. When this CEO will move to a larger organization and introduce the change there, his success will multiply. Such a CEO will not ask for a large compensation package. Also, his office will be small, for lack of need. This is good for the shareholder, for the workers and for the CEO.
    • Lavinia Weissman
    • Executive Director, WorkEcology
    The questions raised here and entries are diverse and provide much experience and thought.

    To my knowledge, since I could not read everything, what was not addressed is what is pay for performance.

    In my mind, pay for performance is a method of designing a company culture and the conversations and actions that emerge from a culture that decides to be pay for performance.

    It only works if it is organizational wide and I do not think it can be a approached as a method of pay.

    Presumably when you speak about P4P and link it to CEO pay, that CEO if wise will think about how his compensation plan if P4P factors in to everyone else in the company and how this method of pay is used to remedy a problem, motivate growth or encourage learning and innovation.

    I first became acquainted with P4P the year Larry Bird and Bill Walsh and many others had contracts with the Boston Celtics that gave a team and individual P4P bonus over base. That year, you could see the influence of P4P on the basketball court and acted out at every game. It was not about Larry Bird getting the ball in the basket, it was about the team performing its best and Larry empowering that.

    I never interviewed him to find out if he felt that way.

    The P4P banner was an experiment that Ed Lawler played with at Polaroid in the mid 80's where Polaroid under Mac Booth's leadership was attempting to put the company on a strategic path that empowered innovation. I could never figure out if it worked, but I liked the concept. Years later, at a CEO (Center for Organization Effectiveness Conference, a group of companies met with Lawler and his colleagues at USC from FritoLay, Monsanto and other places. I attended this meeting and I remember a senior internal consultant stating that being the OD person behind P4P meant you needed to have an office where you went to hide.

    The reality is whether its investments, talking about roi or pay, money is the most wired of any conversation these days.

    In examing all the new methods of BPO, HRMS and HR automation, many of them in their marketing brochures have statements that these technologies are P4P systems. The reality is no matter the system, the purchaser or the company has to examine the question of what is P4P in relationship to the company culture and how do I set it up (implement it) and work with company leadership, the board where appropriate and others to teach people to work within the value of this method. That is where in my mind the question of how do you reward needs to be answered and by people who managed the money within the Core Group through dialogue with the various constituencies within the Social Network.

    I really valued learning from everyone here that a link to this conversation was forward to me by a company CEO who is in dialogue with me about P4P.

    [contributor to and http//]
    • Thomas N. Patch
    • Architect and Designer, Tekton Preux Design
    The concept of linking pay to performance has a logical ring of plausible fairness to it, as well as providing tangible motivation to excel. This forum discusses the current situation as though it were reasonable.

    It is not.

    We live in a New Age of Robber Barons. Their greed exceeds the wildest interpretation of any academic theory of economic balance of supply and demand, or any social philosophy of citizenship and responsibility. The amounts currently awarded to corporate executives of public companies are obscene. The shareholders who supposedly own their companies are no more than marks to be fleeced. One shudders to think of the potential consequences when the inevitable reaction to this perversion takes place and the palaces of these Management Mogul's are looted in turn - either by legislation or by revolution.

    Unfortunately, those in a position to temper the current frenzy are apparently so giddy at the prospect that perhaps they too will get their turn at the trough that responsible action is seldom taken. When this ride finally ends, won't we be amazed, each asking the other, "How in the world did we arrive here?" only to be followed immediately by, "Where the hell are we anyway!"

    My understanding was that HBS was founded, at least in part, to counter the lack of ethics pervasive in business during the Last Age of the Robber Barons. It might be a good thing if the School were to retrieve that Gilded Mantle of Ethics from its neglected closet, find a sturdy stallion and lead the charge to reclaim some sense of ethical proportion and responsibility.

    The Distinguished Alumnus pulling down some multiple of $100,000,000.00 may be brilliant, a great guy, and he may even be generous, but in the end he is in fact just a Thief.

    If you think it doesn't matter, think again. The world is in perilous times, where "Do the Right Thing" becomes ever more important to the Worker, the Customer, the Neighbor and the Future. The Investor is counting on the magic of compounded returns. The Thief is only focused on the immediate score.

    The Thief is no Hero, he subverts us all.
    • s k kotwani
    • Asst. Vice President - IT, IndusInd Bank Ltd.
    A significant portion of pay, say 30% to 40%, based on performance motivates an individual to deliver better.

    Some schools of thought convey that performance should be measured by value to the end user.

    I believe that negotiating powers of an individual play a major role in getting higher monetory rewards.

    Further, generally, while the Western part of the globe practices "Rights", the eastern part practices "duties" that derive from individual involvement.
    • Anonymous
    The question is very complex and intrigues all organisations. We need to worry about pay at all levels and not just senior management. A person with a high self-worth will show performance irrespective of whether his/her pay is linked to it or not just for his own self-worth. the second and more important issue is the definition of performance. Is it simply the topline, bottom line or productivity or all of these or something else of greater strategic significance.

    Whether the performance is really good or not is known only by the CEO who understands the latest nuances of the business and the pitfalls. A really good CEO will always guide the organisation through a maze of situations and will take some decisions that may appear expensive in the short run for good for the future. And that will depend on the intrinsic good intentions of the CEO. In fact the CEO has to take decisions every minute and each decision has repurcussions in the future. it is not possible for any other person to even be involved in these decisions, leave alone evaluate them. Hence no one else can judge the performance of a CEO and it does not make any sense to link his pay to performance. The best therefore is to give him a shareholding in the company as he alone knows the possible impact of his decisions.

    For others down the line, the performances are easier to judge as the CEO remains always involved. Even here it can never be 100% but the situation is much simpler as we go lower down. And in such cases, performances can be tied to pay/incentive.
    • Avinash Kumar
    • Consultant, Thorogood Associates
    I feel Pay + Performance is like a cats and dogs race. If one goes faster than other will also follow it. In the present circumstances when the market dynamics decides the demand and supply of everything, 50% of it seems to be real. The only problem suffice here is the external factor and tension.

    I feel that a person will be able to perform best only if he is allowed to follow the natural talent inside him. Most of the organization in the today's world would press for extra hours, strained environment. The result goes in the degradation of his performance.

    There should be an objective set and if he is able to complete and compile in terms of Organization vision, he should be given his part, but should not be penalized for the others performance.

    I feel that there should be a bonus for failure also if the idea is a creative one and sustainable one as it will also lead to future innovation.
    • Dr. Hemjit Balakrishnan
    • Sr. Vice President (Strategy & HR), Health Prime International
    The value of achievement lies in the achieving. --Albert Einstein.

    Pay be linked to performance--past-present-expected performance has been an intriguing debate especially at the Senior/higher level. To quote William Shakespeare, "His promises were, as he then was, mighty; but his performance, as he is now, nothing." Any kind of compensation survey done across industry often leads to debates and differentiation about market capitalization, market potential--growth and global reach. Pay being linked to growth again has brought about further debate on long term vs. short term and current vs. futuristic. There still continues a lot of hype about CEOs being brought with huge pay packets, as "turn around mavericks" and one wonders as to how these companies sustain growth in the long run.

    The extent to which corporate bigwigs are compensated has even been brought out by Indian Prime Minister recently as an "unhealthy trend" and the same highlighted the widening gap in compensation for the top brass as with the bottom ladder to which the corporate reacted in no time.

    Therefore the debates/discussion continues without any hindrances and aspects like "value of diminishing returns" become more of a weapon to be used when somebody falls out of favour with the top.
    • Dele Bamigbade
    • Field Dist. Officer, MDS Logistics, Nigeria
    What a brilliant discussion this week. In a developing world like ours the pay determines the performance, despite that some of us chose the career path in one field or the other, you feel discouraged when all your income goes for the basic necessities. Today people cross from insurance to banking industries and to other places all because they were attracted by the pay rise. Even if there is a tall target set by company and you are aware of the benefits attached, you go extra miles to achieve and become a better person to family and environment. I hereby submit that pay is a morale booster and determines performance here. Thank you. Dele
    • Maria Karachaliou
    • Incentive Mgr.
    Assuming that an immaculate mechanism can be created to link pay to performance at higher and middle management levels, then it would integrate:

    a) past performance and current performance, to set benchmarks that are perceived attainable to the employees and therefore worth trying to achieve;
    b) business goals, to justify benchmarks to shareholders and top management;
    c) market trends, to take into account external factors effecting performance, outside management.

    Additionally, the success of pre-set goals are best to be split to team (which is often at business goal level) and individual (specific task level) KPI's, with individual KPI's linked to Team KPI's so that pay-out is linked to achieving business goals, and at the same time team and individual performance is monitored and rewarded accordingly, so that social loafing is minimized when disseminating the pay-out of the team. At top management level especially qualitative KPI's should also be be factored in a total score through weighted % of pay-out in order to ensure that organizational values such as inspirational leadership, mentoring, reinforcement of goals and incentives on a regular basis, team building, work integrity, and corporate code of conduct are pursued in parallel to business goals, in order to ensure continuity of success and loyalty. Eventually to lead to a consistent trend of achievement of business goals at a time when top management and leaders come and go.
    • Anand Sharma
    • Managing Partner, Grow Knowledge inc.
    We pay for the results achieved anticipating that the motivation coming from the enhanced pay shall keep the employee motivated to raise his performance benchmark in the ensuing year, also. Since the motivation is linked not only to recognition of the good work but also the mode of recognition, monetory incentives always score over other modes. Such incentive is given in the form of variable Pay.And because the incentive value of the of the monetory rewards depends on the economic background / position in the heirarchy, it is advisable to increase the %age of the the variable or performance pay to the total pay, as the heirarchy level goes up. This is because, with the increase in the heirarchy level, the decisions of the employees have more & more bearing not only on the organisation & all stakeholders but also on the Society & Environment. The % age can vary from a low of 30% for lower levels to 60% for the top rung.

    Most improtant, however, will be that the criteria of performance measurement ( KRA Achievement measurement) should be totally transparent & the trust factor in the Organisation should be very high.
    • Jim Winkelmann (OPM 38)
    • Principal, Blue Ocean Portfolios
    The challenge in incentive based compensation packages is to separate the performance attributable to the market in general v. the performance directly attributable to the managers' performance. In the money management industry several managers are paid a percentage of the assets they manage. If the overall market goes up 16% - and their portfolio goes up about the same - so does their pay. So in money management there would seem to be evidence and that there is an incentive actually to "closet index". In other industries there are plenty of examples of managers making ?bets?. Some of the bets work and others don?t. Both the good and bad bets seemed completely reasonable at the time they were made. However as John Maynard Keyes said; ?The most rational of plans can easily be defeated by a random radical event?.

    I am always troubled that in public companies the senior managers have little if any real skin in the game. How much different would their decisions be if it was their own money at risk in some of the bets that they were taking -- these managers seemingly have no real downside and almost unlimited upside. Over the past several years the controlling shareholders stakes have been diluted to the point that the managers have no control group that they are accountable to and have in essence taken over corporate America.

    The optimum way for a board to approach this would be to have in place real measures of contribution like gains of definable market share, real bogies for cash flow and/or revenue performance. Less emphasis should be placed on share price because of the random nature of the market place. Their incentive should be based on well constructed and thought through financial and leadership benchmarks. That might actually force the boards to put some work into these incentive compensation schemes!
    • Rissy
    • HR Officer, Addax
    What are the practical steps to ensure that staff's salary scale reflects performance on the job? I have a presentation coming up on this issue and I would want to implore you to help. Thanks.
    Pay or salary should be linked to a person's past performance. It is a reward for services rendered. If pay is so linked to past performances it becomes a motivator especially in those situations where high performers are paid more in line with level of performance. Some organisations pay employees in advance that is for services to be rendered but this is not likely to motivate. There is no way the company can know the reward most suitable for someon's performance before they have performed their duties.
    • Carole Muller
    • Economist, Free-lance consultant
    When discussing -in this fast changing business world where accompanying change is usually incompatible with being liked by all at the same time, and where CEOs's time in office is short-the adequate level of CEOs' pay or whether financial analysts may use it as an indicator for the CEO's importance relative to number 2, could it be that the current pay-offs reflect risk compensation packages rather than work or quality decision-making incentives? The interesting question is then, for any CEO who got a job at any given pay package, how many had previously turned down the offer when confidentially approached, and how does this reflects risk? Were they better informed?

    It certainly would be nice if we lived in a meritocracy, but while performance-based pay works well in theory or at lower hierarchy levels, in practice, and in particular at top exec or CEO level, it is very fluid, and may cancel out the incentive for excellent preformance intended. For does merit always translate into performance, and are all performances always beneficial to the firm? If you're in doubt look at the extrememy golden handshake to the exiting CEO of EADS who mismanaged a flourishing business (Airbus,
    orderbook full) by -among other things-requiring head managers not to report delays, problems etc..., reports should always be "rosy" ...until the invisible emerged resulting in the strange phenomenon of a company having to fire qualified employees while overbooked with orders. Performing?

    At CEO-level, things are complex; the the decision-making must arbitrate between dimensions that do not add up.Technical, sales, financial and innovation performance cannot be compounded into a "performance index".

    There is the choice dilemma between short term and medium term/long term results, nowadays usually a choice betwwen some rash financial operation versus sustainable growth via increased turnover, whether medium term by expanding markets or longer term by innovating. For example is (1) a short term stunt of selling out productive assets in order to raise liquidity enough to buy back stocks and manipulate stock markets a performance superior to heading for medium-term result by building up exports?

    There is the sales choice dilemma for new technologies with heavy sunk costs, barriers to entry etc...having to be there before competition and having to balance sustainable growth via customer satisfaction versus jackpot volume and disappear before class suit problems, for example a non-invasive surgery cancer treatment equipment is being sold, truly innovative, but it burns off healthy tissue and leaves malignant cells, because the application, developed in haste did not take into account that the accompanying medical imagery techniques (not developed by the company) do not match, in other words, the surgeon is not treating the area he sees on the imagery.Is selling such applications, after having stretched the clinical data so far they may be misinterpreted by most doctors apart from some very keen specialists that will dare to assess publicly the technology and get cut off from the lucrative pharma support to their clinical research, a performance worth paying a bonus to the CEO ?And is such payment then performance-based or is it a compensation package for accepting the risk to ride the storm of a class suit, not to mention the ethical aspects? Because then, investors should know, and the problem is that then, clients would know too.....The marketing strategy retained by the enterprise mentioned here was then to wine and dine health regulatory affairs officials until getting the technology under health reimbursement schemes in order to sell more and faster as the "new must-have non-invasive tool" given green-light by the reimbursement scheme of etc... Of course, it did not work (i.e. in countries where health officials have something to say)....Could it be because health regulatory affairs officials are not performance-paid but still are performance-bound by a professional code of integrity?

    Do we not increasingly mistake action with results and (short term,volatile)results with medium/long term sustainability and growth, thereby increasing risk and volatility of stocks?

    There are even issues in measuring technical performance, normally a straightforward thing to define, now becoming complex to assess, even to the CEO of a company himself. I remember a client, the CEO of computer services company wanting to sell services in Europe. Something he said startled me and raised doubts in my mind: "We are the best, because we find 95% of all bugs in any software". I started to wonder, mathematically, how he could define this ratio as far as not ALL the bugs had been found? I partnered with a renowned expert in the Quality Assessment certification field for software to align the sales arguments of my client on the needs or counterarguments of his target clients, large international telecom clients.I had to delicately raise the issue, first with my client (total refusal to cope or cooperate) then reluctantly with the expert (who had wondered in parallel and was holding back) who advised me to back out of this one, even if it cost us money, and not introduce my client, less we?d be ridiculed for ever and ever on our home markets and lose future jobs. I remember we even made drawings to my client, sketching out a road and in a desperately diplomatic tone trying to obtain more specific proofs of results by asking him how could he know he had driven 95 or 50% or x% of the way if the did not know before starting out the distance from
    start to destination? This performance-paid CEO got really angry,refused to provide documentation for their methods and said we were being (hum) "European" (which in his part of the world is really pejorative) and "disloyal" and marketing underperformers he would not deal with. However, my client's wish was to target some very big telecoms my expert was quality assessing, but the expert and I did not have "golden parachutes" and we wanted to keep our reputation, a medium and long term asset worth more to us in our trade than short term maybe-a deal-is closed-money. You may wonder, but since I was being performance-paid according to the ways of my client's home country: no deal, no pay, I, being a sole consultant on her own, HAD TO be risk aversive.The point is, my performance on new markets depended on his (unclear)performance on home markets, while my performance-based pay for finding new markets was not, since it would come from new deals. In other terms having externalised (outsourced) risk, and maybe, maybe not being up to the level, his company probably lost some deals, while the CEO still cashed in. Efficient? For whom? The CEO,the founders of the company or the investors or us the sub-contractors (we worked for free for a few months until we said stop)?

    So it seems to me, one might conclude that nowadays performance-based pays of CEO's need to be reviewed in the light of for instance:

    (1) The degree of risk-shifting and impact on decision-making: Organisations relying too much on performance-payment for buying services (or for acquiring a CEO) should be aware that they shift the risk-sharing balance and may induce anything from risk aversion over prudency to disastrous temerarity, depending on the extent of risk-sharing between the commissioner and the commissioned. Hence decision-making may become biased, erratic or paralysed...and requires make-up, at CEO or board level, before facing client markets, investors and...regulatory authorities.

    (2) The degree to which an industry or trade is hampered by regulations normally uncalled for but set up in reaction to past abuse.Just think of Amaranth Advisors 'manipulation of stock markets by buying up gas contracts, a stock market performance increasing gas prices to US consumers from 4,80 to 8,45 USD per unit in July 2006 in spite of unchanged supply and demand. Amaranth's star tarder,Brian Hunter, was massively dealing on Nymex until things became visible to regulatory authorities and following the subsequent Amaranth Advisors' collapse the US Senate commission of enquiry concludes it follows Enron and the legal void left by Enron.

    (3) The degree of to which a firm internalised in its accounting (projected on its performance) external factors unrelated to the actual CEO, namely of public sector programs and policies supporting the firm or acting to compensate for erratic decisions taken by the firm, hereunder the Board or the CEO's predecessor (the compensation payment for past trouble to emerge in the future and to be assigned to the CEO). Although the price to society in the Amaranth story (US consumers' loss
    of purchasing power+ investment power lost with the lost fund) was high, yet it was never being being calculated into the performance of Amaranth. Public finance thinking masters such as US economists Musgrave & Musgrave pointed out already a generation ago such fallacious market mechanisms (when liberalism goes beyond ethics and destroys liberalism), arising when the performance of an enterprise does not take into account the cost to society of its errors, namely when public financed programs must be carried out to support or compensate for its failures.

    (4) What if ethics diverge or performance definitions within the firm (managers-CEO or CEO-Board) or between the firm and its environment as to what is economically sound and what is not, who would/should benefit and who would/should not, what is short run and what is not, what is constructive and what is harmful? Should society (public health) or the enterprise (class suit) pay for the patients who received suboptimal/harmful treatment? What if the enterprise elegantly is under liquidation to escape claims? What if the insurance companies elegantly applied adverse selection or retroactively reject compensation claims (in order to perform better financially at the end of the year)? What if the hedge funds behind the companies collapse because when trying to outperform each other, they manipulate the stock market to the extend of their own collapse? Where are the boundaries for current performance?

    (5) CEO-Board constraints or support. It is important to remember that a board sometimes has to back up a CEO who handled against their interests unless they willingly accept to loose face, which is sometimes very costly when industries are linked. In the medical technology case quoted above, the board comprises global electronic industry giants...

    We need new assessment tools, new ways of thinking, new regulatory approaches, and a new and fresh conceptual attitude to performance to set boundaries for what is performing and what is not, and to find ways to proceed in a global world with various definitions of performance: in some parts of the world performance will be stock market (short term) results and downsizing, in other parts of the world it might be job creation or innovation potential...

    P.S. Concretely, I'd suggest as for the relevance to financial analysts of the differential between the pay level of the CEO and the pay of Number 2 that regardless of where in the world, it may certainly not be a useful (i.e; univocal) indicator of the competences or prospective performance of the CEO, since it may as well be an indicator of a person having pay bargaining power but being devoid of market understanding of the trade, it may be a payoff for having to yield to various board pressure or having to inherit of past mistakes (look out for companies that did not find a suitable CEO from within and had to go far away to find one with no clue....) it may also be a signal to the competition or investors (our CEO can't be bought and we can afford it), or it may simply be?that number 2 is being underpaid. In other words, it seems to me that the cited Moody indicator is more of a work (or takeover or leave) incentive to number 2 than to the current CEO.