Bonus payments to managers have come under intense criticism as a result of the financial crisis. However, bonus plans are important instruments for motivating managers and employees. The problem is that these bonus systems are often poorly designed. In his pioneering work on indexed bonus systems, Obermatt's CEO Hermann Stern has developed concrete methods for relative performance measurement to motivate for the long term in a transparent and fair manner.

For CEOs and other members of the Executive Board I recommend Board members to implement indexed bonus programs that are based on financial and non-financial metrics and to reward short and long term performance likewise. Thus, the operative performance is being measured reliably, cycles neutral and in an integrated way.

The Obermatt Bonus index eliminates arbitrary stock price movements. This approach is convincing for management compensation.

There is long battle to be fought to overturn the flawed orthodoxy concerning executive compensation.  But it is a battle worth fighting because current practices are bad for shareholders and bad for economic growth and prosperity.  Hermann Stern is an important and positive voice in this battle.  I admire and respect what he says and does and highly recommend his Bonus Index blog.

One thing that is not used as often as it should be used is benchmarking the relative performance of the company to other companies in that sector.