The Markets 

Investors' response to the possibility the U.S. government might partially shut down on October 1 was muted. Some U.S. stock markets gave back a little for the week; others moved higher. All remained up year-to-date.

So, are investors confident America's elected officials will do the right thing? Or, have they become complacent? Are they so accustomed to debate and delay that it doesn't faze them? According to The Economist:   

"[U.S.] Federal spending comes in two types: discretionary which must be authorized every year; and mandatory which is set in law. These labels are confusing because much discretionary spending is anything but: it includes funding for the justice system and defense. Since 1976 Congress has required itself to pass a dozen appropriations bills annually to cover this stuff. Unfortunately, it has missed its deadline every year since 1994. To keep the lights on it has resorted to temporary resolutions to finance discretionary spending at existing levels until agreement can be reached, sometimes after a brief pause for effect."

As it turns out, government funding has expired 10 times since 1981, and the government has closed down each time. Nine of the 10 closures occurred over weekends so they had limited impact. The tenth lasted for 21 days during 1995 and 1996. We should learn how this round will turn out pretty quickly.

Notes: S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron's, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

merit-based systems are all the rage... One definition for 'merit' in the Merriam-Webster Dictionary is: Character or conduct deserving reward, honor, or esteem (also: achievement). If someone performs well, we want to reward them. If they don't, well, maybe we won't.

Merit-based systems are everywhere. For companies trying to retain top talent, recognition and rewards systems are essential. Almost 83 percent of employers use merit raises, according to the Compdata BenchmarkPro 2012 survey. In 2012, the average worker pay increase for merit was 2.7 percent. That's expected to increase to 2.8 percent for 2013.

Corporations aren't the only ones who tie pay to performance. In some school districts, teachers' income is linked to student performance, and about 20 percent of state aid for undergraduate students is tied to achievement in the United States. Under the Affordable Care Act, the income of public and private hospitals will be tied to performance measures such as patient outcomes and cost containment. Earlier this year, hospitals in New York City negotiated with physicians unions to link doctors pay to performance, too. A study published in The Journal of the American Medical Association in September found providing financial incentives to clinicians for achieving better health outcomes was effective over the short term.

One tricky thing about merit-based pay systems is deciding how to measure performance. According to The Wall Street Journal, CEO pay may be measured against a variety of benchmarks:

"Compensation awarded to CEOs of 300 U.S. companies rose a median 3.6% to $10.1 million, the analysis found. The total includes salary and annual bonuses, plus the value of restricted stock and stock options at the time they were granted... CEO pay increased slightly faster than profit which rose 2.1% at the companies surveyed. But, it lagged behind the median 14% increase in total shareholder return for those companies which includes share-price movement and dividends."

The article reported investor influence exercised through 'say-on-pay' votes - annual non-binding votes on CEO pay - has inspired greater consistency in CEO pay. In fact, for the first time in the history of the survey cited, the largest piece of the CEO pay puzzle was linked to financial or stock performance.

"Success consists of going from failure to failure without loss of enthusiasm."

~Winston Churchill, British Prime Minister

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