2007/04/24

Failing at Business, Lesson 4 - Greed, Greed, and More Greed

There are many examples of unbridled corporate greed, but in the case of Ford Motor Company, the stratospheric compensation of their new chief executive, Alan Mulally--when coupled with the fact that Ford continues to hemorrhage money--makes them an example of how not to succeed in business.

Some facts:
  • Mulally, who was hired away from Boeing, was paid $28M for a mere 4 months of work.
  • At an adjusted rate of $84M/year, Mulally has increased his salary by almost an order of magnitude!
  • Taking into account Ford's record $12.7B loss for 2006, Mulally was paid approximately one million dollars for each $150M that Ford lost.
  • Taken another way, Mulally was paid approximately $750/worker that he supposedly manages.
Now you may say, "Well executives have to be incented to take risks." But of course, this entails no risk for Mr. Mulally. If he does nothing for Ford, he'll still make 8X what the previous CEO made in 2005--big risk there! So where is his incentive? Perhaps a better idea would be for Mr. Mulally to have to pay $1M for each $500M that Ford loses in 2007 and to receive $1M for each $100M that Ford makes. We call that 'tying pay to performance', a concept that I'm sure Ford's 'rank-and-file' employees are very familiar with.

I'd also be willing to bet that if half of Mulally's ludicrous compensation were distributed among the employees, it would go a lot further toward bringing Ford out of it's current slump.

24 Comments:

The "risk" argument has always been silly, even before the pay ratio between ceo and worker got so out of hand.

You'd think Mulally would at least be a little embarrassed to take that kind of money after that kind of loss. Uh-uh. These guys have no shame.

A few years ago, I attended my niece's graduation from St Anselms' college in NH. The guest speaker was none other than Dennis Kozlowski. He talked a good game about character, morals, etc. But a very short time later, the scandal broke. Like I said, no shame.
It's funny that the worker takes the blame from those on right for the failure of American manufacturing concerns as being over paid, when the CEOs who reap millions even when their companies fail under their "leadership" because they are demmed "worth it"..
I think the stockholders are ready to take Mr. Mulally to the cleaners and not to fluff up his clothes either.
I say we outsource all the CEO jobs to India to save money. Who's with me?
Abi, Lew... To be fair to Malally, the losses at Ford have to be attributed to Bill Ford, the previous CEO, but...of course, that has no bearing on Ford basically paying out a full year of Malally's Boeing salary just to lure him away.
Peacechick... Gonna wash, spin, and fold him...eh? I'm all for that. Ford is going to lose a lot of jobs in the coming years if Mulally's tenure at Boeing is an indication of how he'll move to turn the company around.

Fashiongirl... I'm sure there are some enterprising Indian execs who'd be willing to do Mulally's job for a fraction of what Ford is paying him.
Hah, I've NEVER said the word "incented", NEVER!

Fashiongirl, I'm with you. Good Hello, How may I assist your excellent company in losing $12billion? ~~ D.K.
Anyone who buys a Ford product is in for a rude awakening. From a mechanic's point of view I can tell you that you may be thinking you are getting a bargain but what you're really getting is "screwed".
D.K... "Incented" may not be in the dictionary yet, but it's certainly common enough slang.

PT... Every time I rent a Ford (or drive my Mom's) my back starts to hurt before I even get in the car. Bad, bad, bad interior ergonomics.
I knew there was a reason I wanted to go back to school to get my MBA.
FASB and SEC Mull U.S. Exec Pay Accounting Change

America's accounting chiefs are close to deciding that salary and perks exceeding two million dollars annually can not rationally be deemed pay for work expended. Payouts of five million to hundreds of millions would quite boggle the minds of both Adam Smith and Karl Marx, said one insider, "off, off, off the record."
Going forward, the recommendation will be that executive remuneration exceeding two mil annually will be construed as a disbursement of corporate capital in amounts agreed to by boards, directors, trustees and not so trust-ees as the case may be.
The new accounting Pronouncement will reflect that mega salaries in excess of the maximum two mil will be considered as an allocation of corporate capital which will no longer qualify for accounting treatment as a corporate expense.
A number of CEO's have formed a study committee particularly in response to the IRS position of "You can call it capital or you can call it Swiss cheese, we're still taxing exec' pay at the highest personal rate possible."
"There's a fundamental lack of fairness here," whinged the corporate CEO's. They also pointed out, "even embezzlement is treated as a deductible expense."
Sharehoders, mostly wearing Abu Ghraib style hooding to protect their identities, were cautiously pessimistic.
Me and some guys in class the other day were bantering around names for Ford ... Found on Road Dead, etc. Finally, one guy, who drove a Ford, turned around and said 'Fuck Off, Ricer Douche!' I chuckled.
I have nothing for or against the company since all Mr Pop's company trucks are Fords. I do have something against people who do doodley for a company and then walk away with a big damned sack of money.
Perhaps Ford is a microcosm for what might happen to the US economy.
A canary in the mineshaft.
Praguetwin... Thinking if eschewing high finance for business? ;-)

Cognitorex... ;-) Maybe shareholders at company meetings will have to go in disguise, testify from behind opaque barriers, and have their voices altered.

Malnurtured Snay... "Fuck Off, Ricer Douche!" Bwahahahahahha! And welcome to Blognonymous.
PoP... I don't have anything against the company personally--other than the fact that their cars are miserably uncomfortable. Just noting that maybe giving away big sacks of money might have an effect on that needed recovery.

Aaron... "Canary in a mineshaft"? Maybe "Pterodactyl in a mineshaft"? ;-)
Does anybody really need to be paid that much? Share the wealth man!
kvatch,

The following news article is pertinent to the discussion of the Mulally's pay. The comments about your post suggest the company would earn a profit if no one was in charge.

Meanwhile, it's worth noting that criticism of corporate executives is endless, yet no one seems to have much to say about athletes and entertainers who make more than Mulally but do little more than put on a fun show once in a while. Moreover, many entertainers are known to berate, belittle, harass and abuse those employees who clean their homes and care for their children -- for low pay.

So tell me, what should the CEO of Ford do to return the company to good health. And. Can you tell me what it means when a big corporation like Ford is healthy?

*****
Ford CEO Alan Mulally received $28.2 million in compensation for his four months on the job with the automaker last year.

Mulally, who took over as CEO from Bill Ford Jr. on Sept. 1, earned $666,667 in salary for the year, Ford disclosed in a proxy statement Thursday.

That number was significantly boosted by a $7.5 million hiring bonus and $11 million to offset his forfeited stock options and performance awards from his former employer, Boeing.

Mulally also had $8.7 million in options and other stock-based awards, and $334,433 in other compensation for items like use of the company aircraft.

Ford said in the filing that its board recently clarified that its travel agreement allows for Mulally's wife, children and guests to travel on the company aircraft without him to "ease the burden" of Mulally moving to Ford's Dearborn, Mich., headquarters and away from his family in Seattle.

Bill Ford, who continues to serve as chairman, received no cash salary or bonus, consistent with a 2005 agreement that called for him to forgo any new compensation until the struggling automotive business returns to sustainable profitability.

In terms of other items like stock-based awards, however, his compensation totaled $10.5 million.

Among other Ford bigwigs, Chief Financial Officer Don Leclair had total compensation of $4.4 million; Mark Fields, president of the Americas division, received $5.6 million; and Jim Padilla, the president and chief operating officer who retired in July, had compensation totaling $8.7 million.

Ford posted a $12.6 billion loss for 2006 as the automaker struggled with declining U.S. sales and a big restructuring.

The company offered buyouts to all of its hourly workers and slashed its salaried workforce by a third during the year, and it continues to negotiate for new cuts with the United Auto Workers union.
This seems to be getting more standard. A failing CEO loses millions, starts downsizing and laying off and cutting salaries and benefits, and keeps his own multi-million dollar bonus package.

It's the same thing with some of the airline executives. As disastrous as their careers have been, and forcing employees to take pay and benefit reductions, their own huge salaries and bonus packages are set in stone.

Who Hijacked Our Country
Mary... Indeed! We need to inject some reality into discussions of pay disparity.

no_slappz... Be fair. I took pains in the comments to point out that much of that initial compensation bump was due to incentive and signing bonuses. Nonetheless, Mulally's compensation will top Bill Ford's by quite a bit.

But you made no attempt to address the point of the post: Why should Mulally's compensation be divorced from company performance? Especially when so many of his employees don't enjoy that luxury?

Tom... They're certainly trying to get all they can while they can. Look at what happened at United, while they were going into receivership no less.
kvatch,

You ignored my question about what an effective leader of Ford should do.

I asked the question because if you answer it honestly, I'm sure you will find yourself disagreeing with your own sentiments about capitalism, business management and financial issues.

As someone who avoids cars and wishes others would do the same, the fact that Ford and other US manufacturers will make fewer of them should please you. I believe you and Al Gore dream of the day when the last internal combustion engine is melted down and reformed into solar panels.

Since your overall view is hostile toward cars, I would think any action at the car companies that strikes you as bad news for the companies would, in fact, look like good news for you and your crowd of would-be pedestrians.

It seems to me you should consider excessive pay for management as an act that moves the car companies a step closer to extinction. Of course, if wages were raised for all employees, that would bring on the financial collapse in a big hurry.

What do you want? A prosperous auto industry? If so, that's an industry that produces more and more vehicles every year. Or would you rather see the end of cars? If that's the case, and I believe it is, then I should think you'd accept any means for getting there.

But why would you want to pay more money to people to make products of which you disapprove?

What are your views on the tobacco industry? Should workers on tobacco farms earn more?
kvatch, you wrote:

"Why should Mulally's compensation be divorced from company performance? Especially when so many of his employees don't enjoy that luxury?"

His compensation is NOT divorced from company performance. He has received some up-front money and option grants. But much of that only offsets what he left behind at Boeing.

Meanwhile, if Ford continues to flounder, he will lose his job. CEOs may get lots of money while they're on the job, but like pro football players, they often don't last long at the top job.

Could the Texas Rangers have won the pennant and the World Series because A-Rod was on the team? No.

Can a GREAT manager lead a team of GOOD players to a World Series championship? Yes.

Is Mulally that manager for Ford? We don't know yet.

Can any manager restore Ford's financial and operating health without cutting the employee headcount? No.
no_slappz... I you ever wonder why it is that no one on Blognonymous takes your novel-length comments seriously, it's this sort of nonsense:

...the fact that Ford and other US manufacturers will make fewer of them should please you.

I believe you and Al Gore dream of the day...

I would think any action at the car companies that strikes you as bad news...

It seems to me you should consider excessive pay for management as an act that moves the car companies a step closer to extinction.

...and the bullsh*t goes on. One comment, more than five instances of you manufacturing my viewpoint and then using that fiction as a basis for your argument.

Arguing that merely because I choose to live without a car that I am automatically hostile to car ownership, is extreme and intellectually lazy.

I don't believe that I've have ever argued that somebody that truly requires a car--even you--should give it up. Rantings against inconsiderate cagers don't count. Quite the contrary, I have consistently challenged people to examine their reasons behind owning more cars than they need. I have challenged people--including you--to consider the benefits of going carless.

But please, if you can prove otherwise, I welcome your attempt to do so.
kvatch,

You have avoided answering my basic question:

What consitutes good management of Ford Motor Company?

You criticize the paycheck of Mulally without supporting your notion that giving him a big check is a bad idea. It might be a bad idea. Or maybe not.

Ford IS facing bankruptcy. Changes must occur. Past management decisions are spilled milk. Mulally must work with the company he was given to guide.

What do you think he should do?

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