Today I was listening to the on-going debate of Executive Compensation and the struggle companies are having in this economy.  There is so much talk these days about setting up pay for performance systems that reward growth and punish failure.  In equal proportion there is talk about executives should be aligned with investors and hence they should suffer when the stock price plummets as we are experiencing in today’s economy.

All of these are excellent points but we are trying to solve them at the wrong level (remember Einstein’s guidance “a problem cannot be solved at the same level it was created”).  We have lost sight of the fundamentals of running a business.  Let me explain

A business is a living system that is designed to transform one form of energy, mostly the efforts of the people into another form of energy, the value proposition we provide our customers.  It is the job of the Board, the CEO and the Executive Team to be clear about the value proposition and how to build the right business model to deliver on this promise.

As with all systems there is a need for feedback to ensure the various components of the system are operating as designed.  This is the primary purpose of our financial systems, to provide feedback to those responsible for the performance of the system so they can make adjustments as necessary.

What seems to be happening in our business community, maybe in our society, is we have lost site that it is the system being measured  that we are interesting in improving, not the measurement system.  Of course having accurate measurement tools has always been critical to any system designer so I do not want to minimize the importance of the measurement system.  And at the same time we must remember that it is not the measurement system that produces the results, which is what I think many people think happens.

So if we want to understand how to reward a CEO for performance we must fist understand the system that is doing the performance and acknowledge when the system is performing well and when it is not.   Yes we need measurement tools for this but be careful for all measurement systems can be adjusted to give the result you want without effecting the underlying system being measured.