I’m indebted to Thomas Kirchner, a fellow business commentator, who has a radical idea. If the goal of organizing a CEO’s compensation is go give him or her a real personal stake in how the business performs, why not look at how Porsche has structured the compensation of CEO Wiedeking?: he receives 0.9% of Porsche’s profits, but had to pledge all of his personal assets for the benefit of Porsche in case he fails.
This formula is interesting on at least two levels:
- If we’re interested in pay for performance, why not link CEO pay to net profit rather than to share price? Isn’t net profit a much more real world indicator of a company’s performance than share price? Linking a CEO’s compensation to share price creates the wrong set of incentives–the CEO knows there are all sorts of strategies for pumping up the stock. Many of them are artificial. We’ve seen that in scandal after scandal.
- If we want CEOs to really have some skin in the game, why not put their personal assets at risk in the event of clear failure? Nearly every compensation package I’ve heard of guarantees a basic minimum amount of compensation, no matter how the business performs. Seen in the light of what they’re doing at Porsche, that seems artificial. Our system sems almost like what the Chinese called “the iron rice bowl,” meaning you get a certain amount of rice every day no matter how hard you work.
- There are many issues that would have to be addressed before the Porsche model could be copied or even imitated. What percentage of a company’s net profit would flow to a CEO? What would be the criteria that represent “failure?” But this strikes me as fresh thinking. And despite all that has happened in the way U.S. companies compensate their CEOs, the experts acknowledge that we still haven’t found the ideal way of doing it. I say, learn from Porsche.
