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? $ N) O- \6 l, \2 J
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."
) h2 B' ^7 a. s) s+ e: KThere 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.  \" n. c) l) u# c( E% }
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.
8 ~) w8 `: M' R+ _. ~9 F+ Z& h! `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?+ u* Z& g8 Y# R& z" Q: |7 q' T" Z
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?

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.
' d8 v( n& L4 D# oThat 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. ( U; O5 r% |+ W( R2 `
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. $ v! M* E$ y3 P+ |, |$ Y
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.

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.# |* C) k! `# ?0 K# A
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?' k0 ?1 P9 E9 V$ n; ?' @* B
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.% L9 s; e  s- d; m# k! n, A
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. ) V. w2 c( J$ q/ D: U# q
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.
! q2 n5 D; y! qI 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. 8 L9 M! V" s- m5 W( H- Q
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.

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.   q3 x* @* L1 d( A
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. % d2 M3 {+ R+ k. [
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?