The Salary Sage

Rewarding Employees for Customer Satisfaction

I recently saw an interesting article on the SHRM website entitled Paying Sales Reps for Customer Satisfaction. It talks about the importance of including this important measure of organizational success on sales incentive plans. While the authors made many interesting points, one comment in particular struck me:

“If increased customer satisfaction will help [an organization] achieve its strategic goals, it is more likely to pay for itself in the form of sales and profits. This increase in productivity will help justify additional costs or the investments needed in organization-, systems- or compensation-related investments.”

In my mind, this approaches the heart of the issue and raises many troubling questions:

•    Does customer service really pay for itself “in the form of sales and profits”?
•    Does it lead to increased productivity?
•    How much is it really worth?
•    How much should you spend to get it?

The article glosses over these points, then goes on to describe how to measure customer satisfaction (surveys, purchasing habits, sales rep activities, etc.) and how to include it in incentive plans (as a determiner, modifier, or qualifier).

But the bigger questions go largely unanswered. Clearly, there are no simple answers to these vexing questions, but it is useful to explore their implications as they arise continuously in incentive plan design. Hospitals, for example, routinely measure and pay for improved employee satisfaction, physician satisfaction, and clinical quality with no easy way to measure the actual value of any of them. In most cases, organizations take it at face value that these outcomes have value and therefore those responsible should be encouraged and paid accordingly. But is this justifiable and appropriate?

The answer lies in the relationship between the improvement and cost required to generate it. In a well-designed incentive plan, you can calculate the cost for incremental increases in customer satisfaction. For example, if your current customer satisfaction ranking is at the 63rd percentile of an industry peer group, and your target is to improve that score to the 75th percentile, by dividing the total payouts at target for all plan participants who share this measure by 12 (the desired percentage improvement), you arrive at the incentive cost of each incremental percentage point of improvement.

But this is only one cost. Merely placing customer service on an incentive plan as one of several measures is rarely sufficient to affect much positive change. Any meaningful improvement will likely require an intense focus, re-engineering systems and processes, behavior changes, extensive training, continuous tracking and monitoring. Each of these comes with its own cost.

But even this is not enough. One must go on in an effort to determine whether or not any of this actually had a positive effect on sales and profits which is the unproven assumption stated in the article. What if customer satisfaction goes up and profits go down (as often occurs, especially in a poor economy)? Even if profits increase, there is no way to attribute this to any one factor.

So where does all this leave us? Must we merely take it on faith that certain improvements are intrinsically good and therefore worth paying for, even if their value can’t be quantified? Perhaps, but I favor an approach that is often overlooked in incentive design. I call it “this AND that” as opposed to “this OR that.”

Most incentive plans include several standalone measures. Performance and payouts then occur based on the achievement of each one separately (hence achieving this OR achieving that). But another approach is to combine measures and create interdependencies. For example, as it relates to customer satisfaction, goals could be written as follows:

THRESHOLD	TARGET	OUTSTANDING
Customer Satisfaction at P65 AND revenues no less than prior year	Customer Satisfaction at P70 AND revenues 5% greater than prior year	Customer Satisfaction at P75 AND revenues 10%  greater than prior year AND profits 2% greater than prior year

Combining measures in this fashion communicates that Customer Satisfaction is more valuable when it occurs in conjunction with other important outcomes. Some might argue that this can lead to disappointment when all the criteria are not met, but the message communicated by a well-designed incentive measure is at least as important as the payout it generates.

Are the Best Leaders Getting the Best Results?

In a past entry, I elaborated on the concept of “double-dipping.” That is when a person is paid twice for the same performance. This occurs often in pay programs that fail to adequately distinguish between what performance warrants a base salary increase and what performance justifies an incentive payout. In many companies, excellent performance results in both.

Instead, I strongly advocate that pay programs clearly distinguish between these two types of performance. But simply distinguishing is not enough. They need to be divided in a specific manner. That is, base salary increases for managers should be predicated exclusively on leadership effectiveness. Incentive payouts should be predicated exclusively on outcomes or results.

Approaching pay this way enables businesses to do something very important – that is, answer the question “Are my best leaders getting the best results?” The reason this is so important is that it is often not the case. It is surprising how frequently we find that weak leaders are generating excellent results, and strong leaders are generating poor results. This can occur because weak leaders may bully their employees to get results, and strong leaders may be too soft on employees and don’t hold them accountable.

If the pay program can tell us who are our best leaders, and who is getting the best results, then we can begin to focus training and development efforts to improve their specific weaknesses with the goal being to have the best leaders producing the best results. In addition, we can begin to weed out cases where poor managers are getting weak results. Conversely, we can avoid accidentally losing the leaders who are getting excellent results simply because they are weak managers.

In a properly designed pay program, it is possible to rank managers from highest to lowest on BOTH leadership effectiveness AND results. The exhibit below is an actual such ranking from one of my clients (the names of the managers have been suppressed).


The left hand column ranks the managers from the best (1) to worst (38). Adjacent to each one is the associated ranking of their results. For example, the best leader (1) produced results which ranked 25th out of 38 (not very good). The 5th best leader, on the other hand, produced the best (1) results.

Looking at the other end of the spectrum, the worst leader (38) also produced the worst results (38). When viewed in this manner, it becomes easy to see which managers are “keepers” and which should be considered for replacement. In the exhibit, the managers highlighted in green are the best, the ones in red are candidates for replacement, and the ones in yellow are at risk. The others are what you might call “typical.”

This demonstrates the power of a well conceived pay program. And it all stems from a basic separation between the factors that drive base salary increases and incentive payouts.

MEASURE OF THE MONTH – Process Improvement

This month, we are featuring Process Improvement. As you prepare for a new year, an important measure of success can be making sure your internal processes are running efficiently. Here are some guidelines on how to make Process Improvement a successful incentive plan measure.

 

DEFINITION

Ensure current processes are efficient and well documented and that managers understand these processes and can use them effectively.

 

WHEN TO USE THIS MEASURE

Use this measure when you want to encourage employees and managers to focus on improving the overall efficiency and effectiveness of departmental systems and processes. This measure is often considered a precursor to a full-fledged service measure as it is necessary to ensure the department is functioning efficiently before it can provide excellent service to customers or other departments.

CALCULATION

Performance on this measure can be quantitative or subjective depending on the nature of the process. If the process involves manufacturing, then the obvious factors of volume, quality and timeliness apply. If the process involves service, then it is likely that success will be more subjective. When measuring service-oriented processes, volume, quality and timelines remain relevant, but instead of being determined empirically, results will depend on input from those using and benefitting from the process (i.e., customers, users, managers, peers, colleagues, and subordinates.)

HOW TO USE THIS MEASURE

When Process Improvement involves subjective elements, it is useful to think of it as a six-part process:

Part 1 -- Determine the necessary/desired improvements.

Part 2 -- Develop a detailed plan for implementing the desired/necessary improvements.

Part 3 -- Get the plan approved by whomever will be judging its ultimate success.

Part 4 -- Implement the plan.

Part 5 -- Communicate improvements to users in writing and/or face-to face training as appropriate.

Part 6 –- Determine if desired improvements have actually occurred.

Each of these six parts should be included in a well-designed incentive plan measure and associated goals. For example, Threshold could be achieving Parts 1 & 2, Target could be achieving Parts 3 & 4, and Outstanding could be achieving Parts 5 & 6.

WHO IS THIS MEASURE BEST FOR?

This measure can be used virtually anywhere since every department, regardless of its purpose and size, has processes that can always be optimized.

CAN THIS MEASURE BE GAMED?

If you follow the recommendations above, there is little concern that this measure might be gamed or abused in some manner.

Benefits of Incentive Plans and Incentive Plan Builder

If you’re looking for ways to keep your salary costs under control AND motivate your managers, you really should consider shifting dollars to variable pay. This limits your expenditures to only those employees who generate meaningful outcomes for your business and enables you to clarify for your managers exactly what you want them to accomplish and how much they will earn. It doesn't get more motivating than that!

Check out this recent blog entry, Salary vs. Incentives -- Two Very Different Tools, to learn more about when to use base salaries and when to use incentives to motivate your managers.
 

Based on results from a recent customer survey, here are the top 10 reasons companies use Incentive Plan Builder, the online incentive plan design tool for managers:

1. “Incentive Plan Builder helps to focus my employees on the individual, team, and company results they can drive.
2.  “There’s no better way to get buy-in from employees in areas that make the biggest impact on our business.”
3. “Incentive Plan Builder provides the discipline to motivate us to go through this important process.”
4. “It’s a great tool with sound logic that ensures standard incentive plans for everyone."
5. “Incentive plans make employees feel like important members of the organization.”
6. “Going through the incentive design process helps us think about what it means to be a growing organization and what it takes to do more and do better.”
7. “Incentive plans allow us to use all of our organization’s creativity to reach and exceed our goals.”
8. “Using Incentive Plan Builder helps me be smarter about setting goals and keeping the big picture in mind.”
9. “Incentive Plan Builder provides a central and organized place to house all incentive data.”
10. “Incentive Plan Builder is a valuable and effective management tool that is universally applicable to all companies."

There's no question that custom-designed incentive plans motivate employees. The only question is, are you ready and willing to invest the effort to implement this important process? The answer should be "yes" if you're committed to making every compensation dollar work for your organization and driven to maximize business results.

 

Introducing a New Goal-Setting Concept: The “Leave Behind”

One of my favorite goal-setting concepts is something I refer to as a “Leave Behind.” This is one of the most useful techniques I’ve found for creating incentive plan goals in areas that are inherently subjective and difficult to measure.

Creating goals for objective and/or quantifiable measures is simple; you just choose a number. If you are measuring something like productivity, lost time injuries, or patient satisfaction, you can fall back on data in the form of output per labor hour, injuries per 1000 work days, or percentile ranking versus prior year respectively.

But what do you do when the measure involves competency training, or process improvement, or leadership effectiveness? Many managers shy away from using these important measures because they don’t think they are measurable. Or, worse yet, they include them but use nebulous, irrelevant goals that result in confusion, misaligned expectations, inappropriate payouts, or all three.

Take for example a situation where a manager responsible for a hospital’s biomedical equipment (e.g., IV pumps, scanners, microscopes, centrifuges, etc.) is paying an outside company to perform maintenance and upkeep on the equipment. Let’s say that outside vendor keeps raising its rates and the manager wishes to reduce these costs and ultimately start doing the maintenance in-house. He develops a measure for this and puts it on his incentive plan.

Most managers approach this one of two ways: they either focus on steadily reducing costs as a way to demonstrate success, or they focus on getting their people trained to perform the task. This might results in goals that look something like this:

MEASURE	THRESHOLD	TARGET	OUTSTANDING
Reduce Maintenance Cost	Reduce cost by 20%	Reduce cost by 40%	Reduce cost by 60%
Competency Training	Complete training by end of Q4	Complete training by end of Q3	Complete training by end of Q2

The problem with such goals is that they are entirely unclear as to what must occur to accomplish the objective. This often results in payouts for the wrong thing or perhaps for nothing.

In the first example, what if the manager finds a cheaper vendor to do the work? The goal could be accomplished, even if the vendor does shoddy work that results in all the equipment breaking down. And nothing is accomplished toward preparing the hospital to do the work itself.

In the second example, the training might actually be completed, but how do we know the technicians actually learned anything worthwhile? Did anyone successfully complete the training or just show up? And just because the training was completed earlier, it doesn’t mean it was done better; in fact, it could be just the opposite.

Enter the “Leave Behind.” A “Leave Behind” is just that, something of value left behind. The trick in designing effective incentive plan measures is to ensure that every time you make a payout, there is something of value left behind. Then even if a goal is only partially achieved and you didn’t get everything you wanted, what you did get had real value. Think of it this way – if at the end of the year the manager left, would his replacement be able to start where he left off and build on the results, or would the new manager need to start over? If the goal involved a “Leave Behind,” the new manager should be able to build on what was left behind.

This is the real problem with the measures in the examples above. If you were the manager’s boss, ask yourself this question – “If I paid my manager to accomplish those things, what would I really have at the end of the year?” The answer is very little.

Now look at the following measure:

COMPETENCY TRAINING

THRESHOLD: 1) List all critical life-support and high risk biomedical equipment to be included in the training and present list to Dir Facilities (Del Re) for approval. 2) Develop an outline or template for capturing the necessary information on how to test, repair, calibrate and maintain all pieces of equipment. 3) Review this template with Dir Facilities to ensure all essential information is captured. Secure approval on the format. 4) Complete the template for all of the agreed pieces of equipment.

TARGET: Inventory the current skills of all Biomed Techs and determine their level of competency relative to each piece of equipment and identify which Techs require additional training and what training they require. Document this in the form of a report and propose a plan for conducting training to supplement their skills as necessary. This report should include a timeline, projected costs, resources required (internal and external). At the end of this phase, we will understand the gap between what each Tech knows and what they need to know and a plan for filling this gap.

OUTSTANDING: Fully implement the training such that by the end of the year all Biomed Techs are fully trained on all critical life-support and high risk biomedical equipment and that they are following standardized, documented procedures for this work. At the end of this process, they will go into the Health Stream module, take the associated test(s), receive a grade, and pass the test(s). Full achievement of this goal occurs when all Techs pass all tests.

If you read this carefully, you’ll see that something of value is “left behind” at each level. And what is left behind has real and lasting value to the organization. That value is worth paying for, which makes it an ideal incentive plan measure.

So when you are developing incentive plan measures, take care to consider what will be left behind if/when the goal (or part of the goal) is completed. And when you are weighting the goal or otherwise determining the payout, compare the value of the “Leave Behind” to the amount you must pay to get it. The key to well-designed goals, especially in areas less easily measured, is to ensure that when the year is over, something of value has been left behind that will be of lasting value to the organization. This simple test will make you a far better incentive plan designer.

Conversation with Susan Donker

Three years ago, we introduced a new management compensation program for hospitals that we now call MAP (Management Accountability and Performance). It began in partnership with Memorial Medical Center (MMC) in Modesto, California, a Sutter Health Affiliate. MMC and its visionary CEO (David Benn) and Vice President of Human Resources (Susan Donker) were looking for a better way to motivate and reward their managers. They came to Romanoff Consulting for help. Now that three years have passed, we decided to circle back and ask Susan how things have been going. Here’s what she said.

Q: Why did you decide to develop incentive plans for your organization?

SD: We were frustrated by how managers were being rewarded. In our old system, compensation was not tied to organizational results. By using incentives, we shifted to a program that makes leaders feel more connected and accountable to the organization. They recognize their direct ability to impact the organization’s goals. If they do their job right, they will be rewarded. We eliminated the accepted idea that if you just wait for time to pass and keep breathing, you’ll make more money.

Q: What benefits have these incentive plans brought to your organization?

SD: We have seen a definite improvement in the key measures that are required for all leaders: quality and patient satisfaction. People are paying a whole lot more attention in these areas. These results didn’t change overnight, but over the past three years we’ve seen a significant boost in the two measures that we deem most important to our organization’s success.

Q: What do you appreciate most about the process and logic behind the MAP (Management Accountability and Performance) program?

SD: It drives home the message that salary programs are designed to pay for a person’s worth in the market and incentive plans are designed to pay for their results. An employee’s ability to move through their salary range should be a direct reflection on what kind of a leader they are. Our old program allowed people to move through the range for market adjustments and for performance, even if they failed to meet specific goals.

Q: How has MAP helped you improve your organization’s success?

SD: Having two distinct measurement systems, one focusing on leadership effectiveness and the other on results, allows us to track each critical component separately. We’ve discovered that certain managers who rank very high in leadership don’t produce very good results. We’ve also learned that some of our best results are coming from out least effective leaders. This knowledge enabled us to pinpoint which are managers need to improve and where.

Q: Do you like the plan documents created using the Incentive Plan Builder software?

SD: Yes, the presentation of data is very clear. At the end of the year, we enter the data and verify the results. In addition to generating each manager’s incentive plan, IPB gives us the ability to collect all kinds of data from which we can develop meaningful reports that pinpoint trends.

Q: How do your employees react to these incentive plans?

SD: The majority of employees get it and like the reward system. Good leaders love it. Poor performers tend not to like it because it exposes their weaknesses and withholds dollars they used to get automatically.

Tangible Equity vs. Synthetic Equity In Privately Held Companies

It's commonplace for newly hired executives to expect (or request) equity when joining a company. This is true regardless of whether the company is privately held or publicly traded. At one time, such equity was reserved for unique circumstances such as turn-around situations or when attempting to attract a uniquely talented individual who could add special value to the business (e.g., an inventor with a special patent or an executive from a key competitor with unusually valuable contacts or relationships). In such instances, it was easy to see why the new executive should join as a "partner." Over the years, these practices have become commonplace and in all but the smallest businesses it is customary for executive compensation plans to include some form of equity.

In general, I am opposed to granting equity to new executives because I see no need for the owners to give away hard-earned value to someone whose future contribution is uncertain. Remember, on their first day every new employee is considered a star (or they wouldn't have been hired), yet three years later half of them are gone. Others would argue that granting equity to executives ensures that they will have the best interest of owners in mind (since equity makes them an owner themselves). The advisability (or lack thereof) of granting any form of equity to employees is a worthy topic for a future posting, but for now I am going to assume that you have already decided to grant equity and are considering what type of equity to grant.

WHAT'S THE DIFFERENCE?

In general you have two types of equity to consider -- Tangible Equity and Synthetic Equity. Within each are specfic sub-categories.

Tangible Equity (also referred to as Incentive Stock Options ISO or Stock Grants) is actual legal ownership of some portion of the business.

Synthetic Equity (also referred to as Phantom Equity or Stock Appreciation Rights SARs) simulates the cash value of tangible equity but entitles the holder to none of the rights of legal ownership.

When considering which ownership vehicle is right for you, it is helpful to view them separately from the viewpoint of the employee and the employer.

LET'S SIMPLIFY MATTERS

Any Internet search involving tangible equity will reveal a labyrinth of arcane tax treatments and legal considerations. At the end of the day, they are all designed to ensure that the employee and the employer pay their fair share of taxes. This generates an elaborate dance with each party trying to outsmart the others. If half as much energy and intelligence went into trying to increase the value of the business as goes into trying to minimize taxes, so much money would be made that paying taxes would not be inconsequential.

Which brings us to the key issue. With Synthetic Equity all payouts will be taxed as ordinary income (this is not always true, but let's take it as a given since it is true in the vast majority of cases). From the point of view of the employee, this can be viewed as a non-starter. From the point of view of the company, Synthetic Equity payments must be paid out of cash flow and/or retained earnings. Neither of which seem particularly desirable. Let's look at an example.

Consider an executive who has been granted SARs (stock appreciate rights) worth 5% of the business' increase in value over three years. Let's assume the company was valued by an independent appraiser at $20 million on day one. Fast forward ahead three years, and let's say that appraisal values the company at $28 million. The three-year increase in value amounted to $8 million of which the executive holding SARs worth 5% would be due $400,000 (5% of $8 million = $400k). That $400k would be taxable as ordinary income. So the good news is the executive would get around $250k of that after taxes. The bad news from the point of view of the employee is that Uncle Same would get the other $150k. The bad news from the point of view of the company is that they will have to cought up $400k in cash at that point (unless they have negotiated payout terms which is often the case).

Now if this same executive is granted 5% tangible equity in the business, in the scenario described above, there are only three points in time when the executive will ever see any money:

1. When the company is sold.
2. When the executive leaves
3. When the majority owners choose to buy him out.

Unlike Synthetic Equity where the executive usually has access to cash within a specified timeframe, with Tangible Equity the executive cannot count on ever seeing any cash. This is usually considered as desirable from the vantage point of the company since they don't have to come up with any real dollars unless they choose to do so.

Most companies and executives seem to be enamored with the idea of tangible equity. Executive like the idea of "owning something" and companies like the idea of not having to pay anything until it suits them. I look at it differently. I am a huge fan of synthetic equity. From the point of view of the executive, it means real cash in a reasonable timeframe. From the point of view of the employer is it is much simpler to set up, easier to administer, and less costly in the long run considering the legal and accounting fees associated with tangible equity.

THE PERFECT PAY PLAN

In addition to your well designed base salary and annual incentive plans, consider adding SARs to your executive pay plans. They are an excellent tool for simulating ownership and improving focus on increasing the value of the business.

The Right Leverage Can Move Mountains

In the last entry I addressed how much stretch to build into goals. In this one I take a look at another key element of incentive design, how large should the incentive earning opportunity actually be? Incentive opportunity is also referred to as leverage (because it is normally calculated as a percentage of base salary or salary range midpoint), or dollars at risk (because incentive dollars are not guaranteed. Whichever term you use to refer to it, the table below gives you a rough idea of what would be considered typical leverage for a variety of positions:

(1) Sales positions at this level may have a Target greater than that shown depending on the nature of the sale. Some sales and sales management positions may even have targets as great as 100% of base salary. Click here for more information on setting sales targets.

Check out Incentive Plan Builder for more information on payout targets.

Goal Setting & Probability of Achievement

When designing incentive plans, the question often arises "how hard should it be to reach target?" There are many theories about this, but in general I follow this approach:

I like to set Threshold (i.e., the minimum level of performance below which there is not payout) so that there is 1 in 5 (20%) chance they WON’T be met. This is important. Thresholds should never be set so low that they are virtually guaranteed. When that happens, the company very well might be making payments and getting nothing of value for them. On the other hand, if Thresholds are too difficult to achieve, too many people will fail to reach them and the incentive plan will be perceived as unrealistic resulting in many participants not even trying.

I like to set Targets (i.e., the desired or expected level of performance) so that incentive plan participants have a slightly better than 50/50 chance of hitting them. Am I a “softy?” Maybe, but I prefer to look at it this way – Success breeds success. And I would much rather have people hitting targets more often than not for the confidence that provides. Yes, you may say, but aren’t you giving away money? No, because I always make sure that the company’s return on performance is greater than that of the employee. That way, I can always be sure that the Company is better off having the results than not having them. Yes, you might add, but what if the company would have had the results anyway? To this I would answer, you might get away with that for a while, but eventually employees are going to feel used and undervalued and either leave, or worse yet, their body will keep coming to work but they’ll leave their brain at home.

As for Outstanding, that should be a real stretch. I like 10% because that suggests that one year in 10 someone could reach or exceed them. Said another way, if 10 people are given the same goal one might reach the Outstanding level of achievement. Going beyond Outstanding can be a very good thing for both the employee and the company (provided the goals are set right). This is the stuff myths are made of. When someone goes beyond outstanding, the word gets out and, if you play your cards right, everyone will be imagining it might happen to them. And good things happen when people dream!

In summary, when goals are calibrated correctly, in any given year (or on any given measure), you would have 80% of employees "in the money" by being above Threshold (20% would be below Threshold and earn no payout), 50% to 60% at or above Target, and 10% at or above Outstanding.

Establishing the right probabilities of achievement when setting goals is something of an art form and it can take a few years to get it right. If you keep the probabilities mentioned above in mind and check actual results against them each year, you can fine tune your performance predictions until you reach the right overall levels of achievement.

Check out Incentive Plan Builder for more information on goal setting.

 

 

 

 

 

Bonuses Continue to Get Hammered in the News

A couple of months ago I described why all the hysteria about management bonuses was a smokescreen and a red-herring (pick your annoying anachronistic metaphor). Now, I am compelled to weigh in again in light of recent developments.

This time, the spotlight of shame has shifted from the ex-Merrill Lynch CEO (John Thain) to the villains at AIG. Their decision to pay $165 million in bonuses, most if not all of which will come out of TARP funds, has cast them in a very poor light. And as often happens when hysteria permeates public opinion, people aren't interested in being confused with facts when it is so much more fun to vilify and accuse. After many months of being blamed for all the problems, Congress is thrilled to have someone else to blame. Listening to them pontificate about waste and excessive spending is as comical as it is pathetic. Policymakers can always, it seems, be counted on for meaningless posturing when serious action is needed. And the public will respond in kind, fixating on inconsequential and superfluous details

How best to summarize this mess? Well, consider this. Incentives are not extra pay, they are merely another part of pay. And they happen to be the part that a person actually has to earn. Unlike base salaries which are paid merely because a person is able to fog a mirror, you actually have to do something to earn an incentive.

Now if you believe that AIG's incentives were paid to individuals who did nothing to deserve them, then your beef is with the people who designed the incentives, not the people who received them. Conversely, if you believe the recipients of the incentives did something worthwhile, then your beef should be with all the other people who did nothing to deserve a bonus and got paid anyway. Get the point?

So rather than vilify incentives, we should be begging for them. Incentives are contracts that only pay out when the recipients deserve them. Rather than guaranteeing 80% to 100% of a person's pay in the form of a base salary and paying it out for nothing, shouldn't we be guaranteeing far less and demanding performance for far more? Imagine a world where executives and managers received 20% of their pay in the form of a guaranteed base salary, and had to deliver specific measurable results to earn the remaining 80%. I am willing to bet that the same AIG employees who earned $165 million in incentives, earned close to a billion in base salary over the same period. They had to do something to earn the $165 million. They did nothing to earn the billion.

So now congress, in its infinite wisdom, is capping salaries at $500,000 and taxing incentives at 90%. Consider what this means. The executives that the taxpayer is counting on to dig us out of this mess show up to work every day guaranteed to earn $500,000 whether they perform or not. Wonderful. And if someone actually wants to link their pay to actual results, there is no way to do it. Not even the circus would make such a foolish mistake -- at least the lion tamer has a little bag of treats he can give to the animals to keep them from chewing his head off.

My great fear is that incentives will take such a PR hit from all this bad press, that boards and CEOs will shy away from them in the future. This would be a grave mistake.

So, as I said back in February:

...while government regulators clamor for caps on executive earnings and the abolition of incentives, don't get caught up in the hysteria. If the people who are saying these things knew what they were doing, they would never have let this mess happen in the first place. Instead, remember that well designed incentives are a key part of the solution, not part of the problem. They provide clarity and transparency by revealing what a person is expected to do, and what they will earn when they do it. They protect against windfalls and focus on outcomes that are controlled and influenced by each individual. So, when you hear that incentives are being abused and misused, blame the leadership teams and Board Compensation Committees who created the incentives, not the incentive plan itself. After all, if someone walks up to your car and smashes your windshield with a hammer, do you blame the hammer?