"Pay For Performance"

Op-Ed, Washington Post

December 8, 2008

Author: Ben Heineman, Senior Fellow, Belfer Center for Science and International Affairs

Belfer Center Programs or Projects: Belfer Center Studies in International Security

One important step -- substantively and politically -- would have been to emphasize in detail how the compensation of the top leaders at each company would be tied to specific milestones on the purported road to recovery.

For the CEOs to say that they will work for a dollar a year if Congress forks over the cash ignores the vital importance of providing compensation carrots (and sticks) for the key executives who, as a team, will have to defy auto history and transform the industry, which these executives had a hand in creating.

Nothing concentrates the mind like a financial hanging. Reduced total compensation for 2009 and 2010 should be set out explicitly and divided into discrete pieces, with each increment tied to a particular goal (dealers cut, factories closed, specific technology steps reached, brands reduced, etc.) For each goal missed, that increment of pay is either withheld or reduced.

This step would have had several benefits. It would have directly addressed one of Congress' biggest questions: Are the auto executives really going to meet their commitments? It would also have addressed Congress' concern for all stakeholders share the "haircuts," which are inevitable for industry survival. And, in particular, it would have demonstrated that executives were going to make sacrifices like members of United Auto Workers union.

Finally, it would have created a uniform set of pay-for-performance goals so the executives had powerful incentives to work together across functions in a cooperative effort which will be so necessary to change not just the metrics but also the culture of the auto industry.

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