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In a year where Home Depot (NYSE:HD) Bob Nardelli’s $210 million golden parachute set a new record for pay without performance, Porsche (PSEPF.PK) CEO Wendlin Wiedeking’s €68 million ($100.2 million) compensation contrasts as a precedent for good compensation and the alignment of shareholder and executive interests.

Porsche was struggling to survive when Wiedeking took the reigns in 1992. It was generating losses, its market capitalization had plunged to a mere 300 million, and bankruptcy was a real risk. Ferry Porsche, patriarch of the family that still controls the eponymous firm, wanted to reward Wiedeking with voting shares held only by the Porsche and Piëch families. When other family members objected, a compromise was struck whereby Wiedeking would receive 0.9% of Porsche’s profits in lieu of shares.

The most striking feature of this deal is not that profits have since risen to almost €6 billion, but that Wiedeking accepted substantial downside risk to get that upside. Unlike Nardelli & Co, Wiedeking had to agree to put all of his personal assets at risk, pledging them for the benefit of Porsche. Nardelli’s biggest risk was that he would only make his million dollar base salary. Wiedeking would have ended in personal bankruptcy had his turnaround effort failed. This symmetry of a manager’s pay package turns a manager into an entrepreneur rather than a stock option collector.

Wiedeking has an uncommon management style. When Porsche built a new factory a few years ago, he turned down some €50 million in government subsidies. He is sensitive to managers spending too much time on the golf course - job candidates are said to have been rejected after mentioning a low golf handicap in their interview. This year, each worker will receive a bonus of €5,200. Wiedeking’s willingness to lead Porsche with a disregard for management textbook methods explains the turnaround rise of Porsche’s market capitalization to €25 billion. It also gave him the confidence to enter into his revolutionary pay arrangement.

It would be easy to dismiss Wiedeking’s employment contract as a typical European quasi-socialist experiment. However, private equity firms have required for many years that managers co-invest some of their personal assets into the companies they bought out, thereby creating significant downside risk for the managers if their efforts fail. Asymmetric risk works in private equity, and Porsche has shown that it is possible to incentivize managers at public companies with downside risk in addition to the upside. It is about time that boards of public companies and their compensation consultants adopt such symmetric compensation policies in public companies.

Disclosure: Thomas Kirchner and the Pennsylvania Avenue Event-Driven Fund [PAEDX] do not own shares of Porsche.

Source: Executive Compensation 2.0: Porsche Leads By Example