Incentive plans that work: Borg Warner offers a compelling example of a program that has been providing steady, long-term value creation.

• Author: Delves, Donald P.
• Position: EXECUTIVE COMPENSATION

BORGWARNER INC. is arguably the best long-term performing company in the automotive supply industry. In an industry that has been through great upheavals and challenges, BorgWarner has consistently grown and increased shareholder value since at least the mid-1990s. This did not happen by accident. The company has had a strong and steady management team with little turnover and good succession. It has also followed disciplined acquisition and investment strategies that have systematically transformed the company from a parts manufacturer to a supplier of high margin systems and technologies.

So what does this have to do with executive compensation?

I was an executive compensation consultant to BorgWarner back in the 1990s. The incentive plans that the board put in place in the mid-'90s are still in place today, and hopefully have had something to do with the long-term success of the company. (I have not consulted to BorgWarner for at least 10 years, so I was very surprised and pleased to read the proxy and find that the incentive plans were basically unchanged.)

So what was so great about these incentive plans?

1. The annual incentive plan is based on EV or Economic Value. It pays out only if the company generates operating profit in excess of the cost of capital--and increases the amount of the excess return. This is a highly disciplined approach to paying for performance. It requires acquisitions and investments to be value accretive. It pays only for results that will, over time, create increases in shareholder value, and does not pay for results that destroy shareholder value. It is a balanced system that requires profits, growth, margin improvement, and a return on capital in excess of the cost of capital. And BorgWarner has been doing this fairly consistently for over 15 years.

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2. The annual incentive plan is based on a three-year set of EV objectives, with threshold, target and maximum performance lines. In other words, the annual plan is tied to the annual achievement of a very clear three-year plan.

3. The long-term performance share plan requires BorgWarner's stock to consistently perform better than a peer group. While this type of plan has become popular as a way to avoid shareholder criticism, BorgWarner was one of the first to adopt such a "relative TSR" plan. Management and the board have been holding themselves accountable to this standard, and winning consistently for a long time.

4. The two plans are...