Back in the early 1990s, when former CEO Wendelin Wiedeking joined the company, Porsche was a struggling brand that was bleeding money. Frequently, in turnaround situations like the one Porsche found itself in, it can be very difficult to attract and retain good managers. However, Wiedeking and Porsche found a way to make joining and revitalizing the company a more appealing proposition for the CEO (who went on to turn around the company and lead it to great success over more than a decade):
When he took the position, [Wiedeking] negotiated a seemingly moot provision in his contract that would give him 1% of the company’s annual profits as bonus – in the unlikely event the company ever turned a profit. The company was losing $150MM a year at the time; no one could’ve foreseen how lucrative that provision would turn out to be.
Though he was later criticized by investors and outside observers for what became a staggering compensation package, Wiedeking stood by the maxim that continues to drive the widespread use of equity and other long-term incentive programs in private equity and elsewhere today: “I think when the company does well, then those who have contributed should share in that.” If managers know they are in a position to be well-rewarded for creating value over the long term, they are much more likely to stick around and do so.