Monday, May 15, 2006

A Fair Share of Wealth

Just last week, Marc Lane, an attorney and financial consultant, wrote on Forbes.com that “repairing the broken process that allows pay and performance to diverge is probably the most important reform measure on boardroom tables.”

I couldn’t agree more.

One company that is already making enormous strides in this area is Progressive.

One of the nation’s leading auto insurers, Progressive has long been an innovative company in a traditional industry, pioneering online sales of car insurance, offering price quotes from other firms on its website and creating one-stop claims/repair process servicing. Now, Progressive is reinventing the way it pays cash dividends to shareholders.

Like most public companies, Progressive has traditionally paid its shareholders a modest cash dividend every quarter: 3¢ per share since the 3rd quarter of 2004. Starting in 2007, the company will pay a once-a-year dividend based on its after-tax underwriting profit, and the amount will be calculated using the “Gainshare Factor”, a performance score that Progressive currently uses to determine employee bonuses.

Shareholders will receive nothing in a bad year, 20% of the profits in an average year and 40% in a great year. (Had the new scenario been in place in 2004, shareholders would have received about $2.50 a share — approximately 20 times what they actually received.)

This new approach rewards employees and shareholders in years when the company is growing, while preserving capital when it’s most needed and when the company’s financial objectives haven’t been achieved.

“Innovation isn't just about new product,” says Mindy Wilson, who heads the Confederation of British Industry’s business performance group. “It's about the successful exploitation of ideas, both old and new.”

In my opinion, companies like Progressive are showing the way.

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