Time to Change Executive Pay

That's how they're rewarded! As the old saying goes, “Tell me how you're going to measure me, and I'll show you how I'm going to perform.”

American executives always have focused heavily on quarterly earnings, but in the 1990s it became a burning obsession. That's when the boards of directors in Detroit (and corporate America) decided to change how they reward their executives. They placed more emphasis on getting their executives to focus on shareholder value, dangling out the prospects of huge financial rewards if they hit their numbers.

It took about a nano-second for these executives to get the message. They snapped to, saluted and got to work.

“You want us to cut the cost of capital?” they said. “No problem!” Boom, they outsourced as fast as they could. They knew the fastest way to cut capital costs was to off-load them onto suppliers' books.

“You want us to immediately boost earnings?” they said. “That's easy.” They cut costs ruthlessly. First they squeezed suppliers until they coughed up every red cent. Then they boxed engineers into budgets that prevented them from spending money on modern technologies, or on high-quality materials.

Meanwhile, executives at Toyota, Honda, and BMW never were distracted by rock-star wages. They were not forced to focus on shareholder value. They did not skimp on their product budgets. They were merely rewarded for making better cars, and boy did they deliver.

Hey, guess which approach is producing greater shareholder value? Toyota's market capitalization is worth more than General Motors, Ford and DaimlerChrysler combined!

The message is painfully clear. It's time for Detroit (and corporate America) to change how it compensates its executives.

First, measure their performance against what really matters. How about quality? Can you imagine what would happen to Big Three vehicle quality if Dieter Zetsche, Nick Scheele and Rick Wagoner woke up every morning knowing the only way they could make millions of dollars in bonuses would be if the quality of their vehicles shot up.? And let's take a long-term look at quality, and include related issues like residuals and sales incentives.

How about productivity? How much more attention would officers devote to making their manufacturing operations more efficient if bonuses were tied to it?

Here are my trigger points to pay management a bonus: profits, quality, productivity, market share and shareholder value. In that order.

Notice I didn't get rid of shareholder value. It's too important to get eliminate. But it should not be the No.1 criteria.

I suppose I could add something here about B.F. Skinner, rats in a maze, and cheese. But some people might object.

John McElroy is editorial director of Blue Sky Productions and producer of “Autoline Detroit” for WTVS-Channel 56, Detroit.