Wednesday, May 24, 2006

Bashing Pay For Performance

The pay for performance compensation plan is bashed everyday. Executives at public companies are reportedly making more money today because of new pay for performance guidelines. In Minnesota, pay for high level executives rose last year despite stock market declines for nearly half of the public companies. Here's a comment from the article.

"People who want to make the pay-for-performance argument are finding it harder and harder," said Robert Kennedy, professor of ethics and business law at the University of St. Thomas College of Business."

In order for pay for performance to work, you need to know how performance is measured. There is no mention of a measurement system. A measurement system for a CEO should be simple. Profits or cash flow. The more money the company makes, the more money the CEO makes.

In addition, pay for performance is at its best when 100% of your salary is dependent on your performance. Minnesota executives typical compensation structure includes a set salary, bonus, restricted stock grants and gains from previously issued stock options. The assumption is that the pay for performance plan determines the bonus and possibly the stock option grants. One CEO in Minnesota reported a set salary of $2.2 million. Is there any real reason to work hard when you know that you're guaranteed more than $2 million? (In fairness, this company earned more than $3 billion last year. The article, of course, didn't mention that.)

People could make an argument for the pay for performance system if executives were actually paid for performance.

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