Tuesday's unanimous vote by the U.S. Securities and Exchange Commission is fine as far as it goes. But the proposed requirement that companies start publishing tables listing total compensation for top corporate officers, along with the true costs of stock options and other perks, still fails to give shareholders a true metric for executive performance. Instead, new approaches—formal or otherwise—should make the link between executive compensation and shareholder value explicit and systematic.

That's the view of institutional investors. The bottom-line question they ask about executive compensation is not: "How much are we paying?" Rather, it's: "What are we getting for the pay?"

Bain & Co.'s interviews with more than 40 institutional investors in the U.K. and U.S. underscore this point: Nearly 100% oppose option repricing; 82% say they want to discontinue rich severance packages; and 70% are against awarding bonuses tied to acquisitions. Yet, 63% are willing to give senior managers a larger share of the value they create for shareholders—as long as executives also share in the downside.

But tying executive compensation to sustained value creation won't happen simply by linking compensation to shareholder returns. Management teams could be focused on the wrong priorities, while still benefiting from a rising market. Or, they could be doing exactly the right things but still be penalized by forces outside their control. The best compensation systems reward successful strategy execution—and include an equity component to align management and shareholders. Executives are pushed to outperform ambitious internal targets and their peers in the stock market.

This message was clearly reinforced by Bain research on sustained-growth companies. Our analysis of more than 2,000 global companies shows that only one in ten achieves sustained, profitable growth over ten years, defined as revenue and net income growth greater than 5.5% and positive return on capital. What characteristics do the top performers share? Most notably, their senior managers make the right strategic choices to define their businesses appropriately and to achieve clear leadership. In addition, they create a culture of performance focused on high-quality decisions, executed with excellence. Executive compensation was an important lever.

The companies that appear to get real benefit from linking pay and performance apply four basic principles:

1. They are clear about what drives value in their businesses, and they communicate it widely, externally and internally, and they measure what matters.

2. They tie compensation to the real value created—reflecting the performance of both share price and the underlying business over time.

3.They recognize that the front line drives the bottom line, and cascade appropriate measures and incentives to key employees.

4. They build trust with compensation systems that are simple and transparent to employees as well as investors.

Dell (nasdaq: DELL - news - people ) is illustrative. Over the years, the computer company has isolated the most important factors that create value. Indeed, Dell's strategy of cost and customer leadership hasn't wavered in more than a decade. With a clear picture of what drives value, Dell ties compensation to the measures that matter. The pay system starts with base salaries for Dell executives that are generally below industry averages. A bigger potential slice comes in the form of long-term equity-based compensation that helps motivate managers to grow shareholder value. Rewards are built into Dell's annual bonus, which uses key value drivers such as operating profit margin and customer metrics to set ambitious targets for executives.

Few could argue that Michael Dell is poorly compensated. But in 2001, he received only 25% of his possible bonus, even though the company performed well against peers. Why? The business fell short of hitting some of its aggressive internal targets. Such numbers should make a lot of sense to shareholders.