Jack Stack is the inventor of open-book management, the president of SRC Holding Corp. in Springfield, Missouri, and co-author of The Great Game of Business and A Stake in the Outcome. Here, he answers a reader's question about implementing a pay-for-performance compensation system.

Q. I'd like to pay my employees 70 percent of their base salaries and tie the rest to monthly objectives. "Pay cut" is all that they see. Is there a better option?

Chris Canada, CEO, On-Site, Austin

Jack Stack responds:

Asking employees to accept a pay cut, or offering new hires subpar salaries, is a bad idea. I have always believed that wages are established by the marketplace. Whenever I start a business, I want to hire the best people in the market, which means I have to meet or beat the salaries offered by rivals. I also like to have an edge over those rivals. To gain that edge, I pay bonuses to employees when they outperform the market.

Every six months, I review vital financial ratios for the different industries in which we do business. The information isn't difficult to find. Most industry associations keep track of various averages. Or, if your competitors are publicly traded, simply access their financial filings on the SEC's website (sec.gov). Armed with the information, I compare our company's vital measurements, including profitability, efficiency, and solvency, with the marketplace in order to find out where the business is strong and where it is weak. Then I tie bonus programs to any areas of weakness. We need to improve those lagging financial ratios or they will ultimately subtract value from the company.

The bonus program allows hourly and nonexempt workers to earn a maximum of 13 percent of their annual salaries if we improve those weak numbers; bonuses for managers max out at 18 percent. About 90 percent of the time, the bonus program funds itself by boosting job performance, which, in turn, improves the value of our company. I would not set up a bonus program that wasn't self-funding and didn't enable me to put 50 cents on the dollar in the bonus pool and the other 50 cents back into the company.