Ford’s CEO comp package: Two views

Posted by Marc Hodak on March 23, 2010 under Executive compensation, Reporting on pay | Be the First to Comment

Ford CEO Alan Mulally made the news today with a $17.9 million payday for 2009.  This included a $1.4 million salary and $16.5 million in stock and options–a total of about $1 million more than Mr. Mulally made last year.  The article noted, as journalists always will, that the CEO got his increase in a year when he secured significant union concessions.  This brings us to the first view of his pay:

“It’s an outrage after all the sacrifices we have taken and the pay he gets,” said Gary Walkowicz, a bargaining-committee member for UAW Local 600, representing workers at Ford’s Dearborn truck plant. “His pay is coming out of our concessions.”

So, the CEO got the union to reduce their pay, and he got more pay.  Ergo, his pay was coming out of their concessions.

According to this view, Ford Motors is kind of a zero-sum game; the pie is fixed, and the shareholders or the CEO get more if labor gets less, or vice versa.  In this view, it’s not fair if the CEO drives down compensation to improve the profitability of the company, only to suck some of that profitability back for himself in the form of higher pay.  That is the view implied by this article.  It’s the view assumed by most of the readership.

Another view is that Ford is part of a market.  Several markets, actually:

– The market for cars.  If Ford produces desirable cars for a competitive price, it will grow.  If it produces mediocre or overpriced cars, it will stagnate or shrink.

– The market for capital:  If Ford generates higher profits, capital will flow into the company, allowing it to grow.  If it produces losses, capital will go elsewhere, forcing the company to shrink.

– The market for labor:  If Ford pays employees more than competitive rates, it will attract more workers than it needs.  If it pays them too little, it will lose workers to other opportunities, and have trouble filling its ranks.

Ford is paying Mr. Mulally competitively.  How do we know?  Because they had to lure him to Ford, and they carefully checked to see what it would take.  Part of what they promised to pay him was variable compensation in line with the company’s improvement in profitability, which is the only reasonable basis upon which to vary an executive’s compensation.

On the other hand, Ford is overpaying their union workers.  How do we know?  By the volume of their screaming when the company threatens to lower their wages, and the fact that when they do, the workers stick around in droves.

According to the market view, if Ford’s CEO helps the company reduce its labor costs without compromising the labor force (because where are overpaid workers going to go if their pay gets cut?), then Ford is better able to compete in the market for cars or in the market for capital.  That’s what managers are supposed to do for the owners.

For the longest time, the UAW’s M.O. has been to threaten the company with higher costs and lower profits if they don’t continue to overpay their workers.  They have gotten a little market religion in recent years, and have made great strides in helping the company stay alive, but too many of them still have the mentality of markets being a fiction, something made up by management as a negotiating tactic.