Negative Earnings, Outstanding Compensation

Managerial merit should be rewarded by a company. On this, we all agree. But on how to do so further discussion is needed.
In 2010, one fifth of CEOs of Italian companies that are part of the FTSE MIB index saw their compensation climb, while net earnings dropped. This fraction grows to nearly a third if we take into account the worsening of total shareholder return. Boards of administration decided CEOs (stock options aside) merited that money, but this seems inappropriate and incoherent, especially in the context of a major crisis.Today identifying managerial merit means to measure company performance taking the long-term sustainability view and acknowledging the contribution to the creation of value for stakeholders made by each manager.
The oft-cited and admired cases of Google, Apple, Nestlé or Walt Disney teach that valuating the merits of management in a more complex context means to expect a lot without making compromises, resort to economic incentives with moderation, take responsibility for valuation processes, to not stop at short-term performance, and create a culture of merit associated with fairness.
How to inject meritocratic logic into management compensation packages?Firstly, by considering CEO compensation as reward for the job done, his/her skills, and short- and long-term business results. In practice, however, the approach of separating the fixed from the variable component of compensation has been inconsistent with meritocratic logic, leading to median salaries above the market average. Added to these are semi-fixed bonuses tied to easily attainable performance, with the result of inflating the compensation of Italian CEOs.
Secondly, merit-based compensation requires making market comparisons, using the right peer group as benchmark, by industry, by business model and by potential attrition. Choosing the wrong peer group or positioning top managers' base salary management above the market median in order to favor retention often leads to unjustified spiraling of compensation growth.
Thirdly, make bonuses less random. Bonuses are functional to align the interest of management with that of shareholders and stakeholders, by making it share the burden of business risk. Often, however, bonuses put results above process, orienting CEOs toward spot results and not toward the improvement of processes that lead to sustainable performance across time.
Fourthly, the evaluation of managerial performance should be unbiased. Today the process displays three forms of bias: evaluators think they are experts and do not devote enough attention, turning evaluations into bureaucratic procedures that forget the final aim (rewarding merit); evaluation of CEO performance usually focuses on sanctioning the past rather than appraising opportunities for future improvement.
Lastly, acknowledging merit is a complex process. It's not coherent in terms of corporate leadership to organize the company around teams and then have a 6 to 1 pay differential between the CEO and the first rank of managers. So either the compensation system is inconsistent with the leadership model or the leadership model is not oriented toward team-working. In short, this is a problem of organizational credibility.
Today CEOs have lost part of their credibility, as they are often overpaid and unworthy of the salaries they receive. To change this situation, rules must be made more stringent, so that those who evaluate executive pay do their job rigorously, by applying principles and measures that assess business performance over the longer term, in a corporate context where there exists a sense of community and fairness at all levels.