I have a very different approach to compensation. I think that the
key is to change compensation schemes frequently. The reason is that
any scheme can be gamed, and the longer you wait to change any given
scheme, the more effectively the participants will have gamed it. That
is one reason I think that "Pay for Performance," the newest miracle
cure for health care costs, will fail miserably. The doctors will be
able to run circles around the bureaucrats. In the U.K., they already
have–all of a sudden, 91 percent of doctors were receiving bonuses for
being above average.
I think that the more Washington tries to regulate CEO pay, the more
it will create a disconnect between pay and performance. Regulation
will inhibit companies from frequently changing their incentive
systems, and that will give CEO’s more time to game them.