Risk and Security LLC

The recent Stimulus Bill passed in February 2009 called bank presidents up to Capital Hill to report how much they made and whether they took bonuses or not.  Most reported they made one million dollars a year and took no bonuses.   Of course, we might suspect that this was slight underreporting.

Is there a link we can assess between performance and compensation?  In a factory, where people are paid by piece work, that is, ten cents for each piece sewn, there is a direct correlation and you could probably provide other examples of direct pay for direct work.

Another place to look is sales compensation.  Again, salespeople are incentivized by commissions so there is the correlation — work harder, get paid more.  

But the farther you go up management food chain, the harder it is to see the relationship between production and/or success of the enterprise and the salary of senior management. 

A recent study by the Health Services Research found that doctors who were paid more for higher quality care did improve their performance. It examined whether patients seeing physicians participating in a “pay-for-performance” incentive program receive better care than those who saw non-participating physicians. The health plan that was examined reimburses physicians based on the quality of care they provide. 

What about in other industries?  In another study, they analyzed the 100 largest technology companies finds that those with the highest-paid CEOs in 2005 had the worst returns.    DolmatConnell & Partners, an executive compensation consulting firm based in Waltham, Mass., found there was an inverse correlation between tech CEO pay and shareholder returns over a one-year period.    Companies analyzed in the study included Cisco Systems, Dell, EMC, Google, Hewlett-Packard, IBM,  and Oracle, as well as telecommunications providers, technology services companies and products distributors.

Perhaps the answer lies in the amount of PERSONAL ACCOUNTABILITY the senior managers have in the success of the organization.  If high paid managers are isolated and insulated from the operations of the company, they may not be in a position to directly affect its success, whether you define success as higher stock price, profitability, improved EBITA or some less quantitative standard, such as, are the employees happier?

Organizations where management stays involved with the day to day operations and can use their influence and wisdom to influence the progress, might be able to make a bigger impact on success of the organization.