Performance Pay Or Lotto

The question that everyone is NOT asking is – "How did Jodee get rich?" We all know.

Jodee Rich and Brad Keeling were paid $7M each when the market capitalisation of One.Tel reached $1 billion. A 300% increase in market valuation of shares may tempt any one of us to part with a mere $14M as a sign of our gratitude to the key people who made it happen.

Simple logic, simple solution – simply stupid! This entrepreneurial approach to performance pay is, and has been, a recipe for pain - just ask the Enron shareholders.

The former Chairman of One.Tel, John Greaves, proudly said he did not seek advice on the performance pay system - he accepted Jodee Rich's proposition - lucky Jodee!

The advice to anyone contemplating performance pay / bonuses for key staff to drive real and tangible improvements is as follows:

	Always measure performance and value through a balanced set of measures to test whether real value has been created. It is all too easy to pump up market price or overstate profit. One.Tel was not even able to invoice most customers; how is that for underlaying value! Use:
	Share price Measure of service or product quality Profit Sales volume Efficiency of key processes Forward orders Capability profile etc.
	Never rely on any ONE measure - too easy to distort.
	Pay for short and long-term goals.
	Tie performance to the business plan and the market if possible.
	Don't be afraid to change your performance measures and targets as the market and business change.
	Extend the payout period into the future to ensure that when managers leave, the organisation is in a fit state. 70% short term and 30% long-term payouts (over 3 – 5 years) are preferable.
	Keep It Simple.
	Always seek outside assistance and Board approval - litigation and ensuing liabilities are high!
	Independent audit of the programme is preferable.
	Make the payout amounts worthwhile. Most performance pay systems are insignificant and rarely serve as a motivator. One.Tel is of course the exception and scores 110% on this criteria.

What Next?

If you are interested in more information please give us a call on +61 2 8399 0011 and ask to speak to one of our consultants. 

Alternatively e-mail us at info@emdgroup.com.au or use the form on our Contact Us page.

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