Want to fix Congress? Let’s institute pay for performance

November 6, 2012, 3:00 PM UTC

FORTUNE — Will the elections bring about improvements in our increasingly dysfunctional government? I fear not. Successfully running for office these days is more about political fundraising and negative campaigning than about the art of governing. Only one in 10 Americans thinks Congress is doing a good job, and no wonder. Our economy is stuck in low gear, and our fiscal situation is precarious. How do we motivate our national leaders to deal with these problems? As with most organizations, it comes down to economic incentives. If our elected officials can keep their paychecks by being adept at fundraising and negative campaigning, then that is what they’ll do. But if at least part of their pay is based on performance, maybe we could get them to focus on doing their jobs. Pay for performance has improved management in the private sector. Why not try it with the folks in D.C.?

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For instance, one-half of compensation for corporate directors is frequently paid in stock, which they must hold for several years. The idea is to align their economic incentives with the long-term profitability of the corporation. There is no stock ownership in the federal government, obviously, but we do issue a lot of debt (boy, do we ever). So here is an idea: Let’s start paying members of Congress and the President half of their compensation in 10-year Treasury debt, which they must hold until maturity. Members of Congress make roughly $180,000, so under this proposal, they would get $90,000 in cash and $90,000 in 10-year Treasuries. (We would add a housing allowance, too, given the high cost of living in Washington.) For the President, it would be $200,000 cash and $200,000 in T-bonds. If the economy does well and if they get our fiscal house in order and institute pro-growth tax and spending policies, those 10-year bonds should hold their value. But if we continue our profligate ways, inflation spikes, and interest rates skyrocket, those bonds may end up being worth as much as the stuff Czar Nicholas issued shortly before the Bolshevik revolution (some of which I bought at a flea market and now use as wallpaper in the bathroom).

And if that isn’t enough to light a fire under our elected officials, here’s another idea: Let’s make the half of their salary paid in bonds conditional on hitting certain performance benchmarks. This is how I would divide it up:

I’d condition a third of the bonds on the labor force participation rate — the percentage of the working-age population who have jobs. (I wouldn’t use the unemployment rate as a benchmark, since it can improve simply because discouraged workers give up looking.) In the 1990s and early 2000s we kept the labor force participation rate at about 66%, so if the rate falls below that, Congress and the President would lose one-third of their government bonds.

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Another third would be tied to GDP growth. Has 1% to 2% become the new normal? Let’s hope not. I don’t want to be Japan. I’d deny another third of their bonds if GDP growth averaged below 3%. If the country exceeded either benchmark by more than half a percentage point, I’d give our politicians an extra $30,000 in Treasury bonds. If they exceeded both, I’d give them $100,000. But here’s the catch: Those improvements would have to last five years, or we taxpayers claw the bonds back. We want economic policies that provide lasting benefit.

The final third would be determined by our citizens. Shareholders get to have an advisory vote on executive compensation. Why not taxpayers too? With every two-year election cycle, we should get to vote on whether we think Congress and the President collectively are earning their paychecks. No more blaming our problems on the other guy. We vote on how well they are working together, and if we like what we see, they get the final third of their bonds.

Running a business and running a government are obviously different, but when it comes to compensation, government could probably learn a few things from well-managed corporations. Aligning pay with long-term performance can be a good way to change behavior for the better. We should give it a try.

This story is from the November 12, 2012 issue of Fortune.