That's the only measure that they accept (and this is a formula dammit! We cannot go against that!).
This seems to me to be a complete lack of understanding about what makes a good programmer (Assumption: We pay people according to merit.). I have a friend who was in another industry for several years. She taught herself Ruby and Rails and became very, very good at doing so. It was all done as a personal project. She never was fully employed as a "Full Time Developer" until last year. At the point of her being hired last year, she could write web applications better than most seasoned programmers.
Yes, yes. Anecdote does not make data. But they are proposing that they have come up with The Algorithm with How to Pay Programmers. If that was true, then they could handle this situation. Instead, they would have to come up with a 'special exception' for this particular person and compensate them correctly.
If you get down to every little hole I could poke in this algorithm, you'd find out that almost everyone has a special circumstance and that throwing them into an inhuman algorithmic compensation experiment is Wrong(tm). Instead, you need people that can understand the nuances of Jim, Joe and Sally's situation and can do their best to serve their interests as well as the company's interests.
I'm not saying that the status quo is great, but this 'perfect solution' is anything but.