Auto Industry Executive Compensation Rankles. And For Good Reason.

Samir Syed
by Samir Syed
auto industry executive compensation rankles and for good reason

Something I’ve noticed: no discussion on corporate governance can go longer than five minutes before executive compensation comes up. It’s as predictable as “the scream” coming up when discussing Howard Dean. And why not? As a possible recession looms, executive pay remains the same. If North America’s economy is coming down with the mumps, its automotive industry may as well have Ebola. Chrysler was declared “operationally bankrupt” by its own its own CEO (before a cynical volte-face), while billion-dollar losses mount at GM and Ford. Yet all the people at the top of America’s piston pyramid continue to be compensated quite luxuriously. What’s up with that?

Take Alan Mulally at Ford, for example. Mulally scarfed $28.2m (plus, plus, plus) to take the top job at Ford. The money was paid before Big Al proved he could earn the automaker $1 of profit. Supporters note Mulally’s track record at Boeing and the “opportunity cost” of his exit (including lost pension).

Meanwhile, GM CEO Rick Wagoner has spent an entire career watching his employer lose market share, shareholder value and money. Although Wagoner took a highly-publicized 25 percent pay cut two years ago, GM’s board has recently restored his salary to pre-2006 levels. They justified the raise by noting GM’s turnaround plan is on track to reach whatever non-defined goal it aspires to. Profitability is clearly not that goal, as it easily escaped the General again in 2007.

As (automotive) executive pay and (automotive companies’) financial performance diverge, it behooves us to see the bigger picture.

First, the phenomenon isn’t restricted to The Big Three. It affects their supplier base as well. Canada’s Report on Business reports that Ontario-based Magna International’s jefe, Frank Stronach saw a 50 percent increase in personal “consulting revenue” (from his own company) last year. Magna’s stock value shrank by 15.45 percent over the same period.

Of course, making a direct link between stock price and executive pay is a gross oversimplification; the kind that led to some of the short-term thinking that has allowed much of this situation to develop in the first place.

Qualitatively, Magna weathered a difficult year. Its number one customer (Chrysler) was sold to a private equity firm, sideswiped by a supplier bankruptcy, and saw a big shake-up at the top of its own executive pyramid. Then again, Stronach’s own bid to buy Chrysler failed, he couldn’t stop unionization efforts at his own plants (some say he invited them to smooth the way for a Chrysler takeover) and he failed to properly hedge against a low American dollar. Stronach also failed to retain majority control of his company.

For all his efforts, Stronach took home $40.1 million in 2007.

Closer to the rust belt, American Axle’s (AA) CEO Richard Dauch banked exactly $10,175,194 in 2007, up from a paltry $9,316,242 in 2006. Was Dauch’s failure to prevent AA’s labor strike of 2008 by acting in 2007 worth the extra money? More importantly, how can Dauch preach fiscal conservation to his striking employees when all four returning AA executives got pay raises from 2006 to 2007?

Meanwhile, Visteon’s CEO Michael Johnston earned $10,783,136, according to their latest SEC filing. Great pay for the man who oversaw the company going from a $163m loss in 2006 to a $372m loss in 2007. Again, I’ll add some qualitative insult to quantitative injury. Where was Visteon’s strategic plan to separate itself from Ford’s declining operations and diversify its client base? It was nowhere to be found, apparently. Visteon continues to depend on The Blue Oval’s fortunes.

In the face of shaky executive performance, you’ve got to wonder why automotive executives’ pay remains sky high. The prima facie explanation is supply and demand. In other words, many firms require top-level executive “talent” and very few people can supply it. Unfortunately, that’s not the entire picture.

The truth of the matter is that CEOs have significant influence in selection of board members, who then have the power to decide how much the CEO should be paid. Even Mr. Magoo would see that conflict of interest, which stifles price competition. Secondly, these boards use a composite benchmark of compensation paid out to executives of comparable public companies to determine what to pay their own CEOs. Neat fact: American Axle’s 2007 benchmarking included both Magna and Visteon! Welcome to the fat cat’s intricate way of saying “well, everyone else is doing it too."

Here’s the bottom line. If an executive can rake-in millions of dollars in compensation regardless of performance, what’s his personal incentive to make his company profitable? We see athletes whose performance languishes after signing guaranteed contracts. If pay, pensions and perks are equally guaranteed, should we be surprised to see CEO’s doing the same?

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  • Landcrusher Landcrusher on Apr 05, 2008

    NetGen, Well, it's always okay to apply labels in a complimentary fashion. Thanks. :) JT, Excellent points, especially this one: "I never thought I would say this, but it is time to bring back shame." We have a judge here that started making criminals where sign boards admitting their crimes, and similar punishments to try to use shame. I don't know how well it worked, but it was very popular with the citizens.

  • Qduffy Qduffy on Apr 14, 2008

    And now it doesn't matter what you think - the Genie's out of the bottle and it'll be nigh impossible to create responsible compensation packages.

  • Probert There's something wrong with that chart. The 9 month numbers for Tesla, in the chart, are closer to Tesla's Q3 numbers. They delivered 343,830 cars in q3 and YoY it is a 40% increase. They sold 363,830 but deliveries were slowed at the end of the quarter - no cars in inventory. For the past 9 months the total sold is 929,910 . So very good performance considering a major shutdown for about a month in China (Covid, factory revamp). Not sure if the chart is also inaccurate for other makers.
  • ToolGuy "...overall length grew only fractionally, from 187.6” in 1994 to 198.7” in 1995."Something very wrong with that sentence. I believe you just overstated the length by 11 inches.
  • ToolGuy There is no level of markup on the Jeep Wrangler which would not be justified or would make it any less desirable [perfectly inelastic demand, i.e., 'I want one']. Source: My 21-year-old daughter.
  • ToolGuy Strong performance from Fiat.
  • Inside Looking Out GM is like America, it does the right thing only after trying everything else.  As General Motors goes, so goes America.
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