Record earnings and the possible return of record performance bonuses at Goldman Sachs made headlines and caused the financial community to ask who hit rewind on the evolution of executive compensation. But the problems that brought down much of the financial-services sector should not be viewed as an indictment of the pay-for-performance concept, but rather as a massive failure of oversight and accountability.

In short, people were rewarded with large bonuses for gaming the system, creating artificial value, obfuscating, and taking on excessive levels of risk—all without sufficient skepticism or scrutiny. As Congress considers overhauling executive pay, it should recognize that managers who create real shareholder value should receive commensurate compensation.

With much of the economy struggling to recover from Wall Street's exuberance and excess, it is vital that as this happens people pay attention to the unintended consequences that could occur if the if the pay-for-performance concept is scrapped. Already, financial firms in the United States have begun losing talented people to firms based in countries less burdened by the kinds of emergency regulatory oversight that curtailed some pay-for-performance programs. Some of the people who left have skills necessary to repair the damage resulting from the financial crisis.

Like most other markets, the labor markets are global. Even in a downturn, financial firms in London, Paris, Dubai, Shanghai, Singapore, and Abu Dhabi, are competing to hire the same people as firms based in Boston, Chicago, and New York. And, if America's public companies cannot pay their best people what they deserve, foreign firms will—and are. Compensation may be fine-tuned by management committees, the board of directors, and perhaps even government regulators, but in many sectors the global labor market now sets the price.

If this trend continues, it could remove from American firms some of their most able people just when they are needed most. The reality is that, despite all the technological advancements of the last 100-plus years, it is people who still make businesses successful.

As a result of intense, negative reactions to performance and retention bonuses paid to some employees, a handful of financial firms have developed programs that inflate base salaries while decreasing or even ending bonus programs. Efforts like these are designed more for their PR value and the regulators than for their motivational power. But while no-bonus programs may play well with the media and among politicians, and may even mollify compensation-committee members who are afraid of new legislation, one can only imagine the impact of formally removing performance from the pay equation.

If people in bonus-free environments are compensated just for showing up, then that's what they'll do. This is not to say that salaried workers do not work diligently and hard. They do. But in businesses where judgment, an accurate assessment of risk, individual motivation, and intelligence are the primary determinants of success, incentives based on real measurements of performance make a difference.

If talented people are rewarded openly and transparently for creating lasting shareholder value, they will work tirelessly to attain that goal. And, because taxpayers are now shareholders, it makes sense to reward employees who are trying to restore value to shares the government owns. But not only that, fixed-cost compensation systems tend to be more expensive because compensation for strong and weak performers is generally the same. The truth is, as many studies indicate, companies get the performance they reward and the behaviors they condone.

What's needed now is not to end the bonus system, but to reconnect it to reality. This means not just better metrics, evaluation programs, and scrutiny, but tying compensation to corporate strategy, long-term shareholder-value creation, cost cutting, and individual accomplishments. It also means managers, and the people they supervise, engaging in meaningful discussions about each of these points. And it means holding people accountable for their results in ways that prevent gaming the system. All of this must be done throughout the organization.

Rewards should be highest where retention is most critical. Right now, for example, banks and other financial institutions need a better grip on risk than in the past and they also need to better understand their financial structures and business models. In these instances, companies must recognize the value of paying world-class compensation in order to attract and retain world-class talent.

But while some people need to be motivated to stay in their roles due to demand for their skill set, these people are generally in the minority. As unemployment pushes toward double-digit levels, few jobs go unfilled. And, for many people, in these tough economic times, simply having a job is reward enough.

A great deal of value has been destroyed over the last several years, and most of it—at least at first—invisibly. An important reason why this happened was that pay, performance, accountability, and oversight all became divorced. Now, as individuals and firms work to restore the value that was lost, it is important to remember what got us to this point in the first place. Unless pay and performance are reunited and the labor markets are understood as global, it is unlikely that all the value that was destroyed will be restored.