How Much Is Too Much?
There have been a number of stories in the news lately about how much CEOs of major companies have been getting paid the last few years. This news generally focuses on how many millions their salary was in a given year, their stock options, and how sizeable their awarded bonus was. In one case, an article discussed Chrysler CEO Marchionne’s lack of pay. (From Chrysler—the same year, the Chrysler and Fiat CEO’s compensation from Fiat was $18.87 million).
Some of our readers have expressed that some of these CEOs have been grossly overpaid, not deserving anything near the millions while the majority of blue collar workers weren’t even close to earning six figures.
Others commended some of the top earning CEOs for efficiently managing costs; increasing the company stock’s value; and being prudent, successful managers.
One news article from earlier this month, Ford CEO Is $34.5M Richer After Stock Payout, discussed Alan Mulally’s million dollar payout after shares from two years ago vested. The ninth highest-paid CEO in the U.S. in 2011, Mulally’s compensation has been a hot topic since the nearly fatal economic downturn for the auto industry, and the government auto bailout that followed.
How much is too much?
Ford returned to profitability under Mulally’s leadership, and was the only major American auto manufacturing company to avoid government-sponsored bankruptcy. Who played a greater role in Ford’s return to profitability—a CEO, or the employees? The greatest CEO wouldn’t be able to turn a profit for any company without hardworking, capable employees behind him or her. At the same time, the best employees in the world could probably not make a failing business profitable again without a talented CEO at the helm.
The first company forecast that Mulally saw at Ford predicted a loss of $17 billion in 2006. He took charge of the company, focused on restructuring global operations, and steered a solid course toward the Ford brand. When the 2008 economic crisis hit, Ford was well on its way toward record-breaking profits, and had the financing in place to weather the economic storm ahead. In 2009, Ford’s profit reached $2.7 billion, its first full-year profit in four years.
So was Mulally’s compensation at Ford accurately tied to his performance? A large portion of his compensation, the $34.5 million stock payout, was directly tied to the company’s performance, which benefitted all stakeholders. These shares that most recently vested saw more than a 500 percent increase from 2009 to when they vested earlier this month.
In many cases, a CEO’s pay is directly tied to the performance of the company since a large portion of the compensation package is generally in company stock. This part of their pay has a major impact on compensation, both positively and negatively. But most companies include a variety of pay options in a CEO’s compensation package: base salary, stock options, travel expenses, insurance packages, and incentive pay.
This leads me to consider another major executive in the U.S.—Boeing CEO Jim McNerney, whose compensation jumped 34 percent last year as a result of a substantial increase in incentive pay. His incentive pay, which doubled to $8.7 million, was compensation for delivering the new 787 and winning a huge Air Force order, according to recent Associated Press news. While those were no doubt major accomplishments for Boeing, at the same time, 2008-2010 company profit goals went unmet, the new 787 was delivered three years late, and labor disputes (the National Labor Relations Board accused Boeing of opening a nonunion plant in South Carolina to retaliate against union workers for past strikes) prompted the NLRB to sue Boeing.
In this case, I’m not sure that McNerney’s compensation at Boeing was quite as accurate a portrayal of his performance as it might have been. He encountered a number of issues while leading Boeing through years of declining fleet purchases and economic hardship for the skies as well as the auto industry, but Boeing is still selling planes and the NLRB did drop the lawsuit.
CEOs provide an indispensible service to companies—and they are responsible for the success or failure of a company. A CEO is responsible for the top-down management of a company, and leads everyone connected to that company towards a unified vision of creating a successful brand. That being said, at how many millions should the line be drawn?
If you were offered the opportunity to take over a company on the verge of bankruptcy, what would you ask for in return? Let me know at email@example.com.