Case Study 7 – United States Auto Industry Back on Top … of CEO Pay

During the financial crisis, many executives’ pay was stifled, reduced, or even withheld.  Among the hardest hit was the U.S. auto industry.  Shareholder groups, union leaders, political officials, and the general public all demanded change in the way auto industry executives were getting rich while their cars were getting poor.  For example, Ford made some major cuts for its executives and its employees. 

This is why people were shocked to find out that for 2011 the CEO of Ford, Alan Mulally, was to receive $56.5 million in stock awards.  Even today, it is one of the richest pay packages ever given to a top executive in the auto industry—and it is even after all the clamor over sky-high executive paychecks.  Is it too much? 

That depends on who you ask.  For most, it seems unreasonable that a boss would make more than 1,000 times the pay of the average worker.  However, if you ask Ford workers who have seen Mulally steer Ford back from the edge of bankruptcy, they probably would not complain too much.  If you asked Ford’s shareholders, it would be hard for them to overlook the fact that Ford shares have gone from $1.56 when Mulally first took over to $14 a share.  If you ask Ford dealers, they may be too busy selling one of the strongest lineups of cars around to answer. 

Of course, no one really knows if Ford would have been sitting in such a good position regardless of Mulally.  On one hand, there are plenty of factors, such as a national economic recovery, that led to Ford’s improvements that Mulally clearly could not have had a finger on.  On the other hand, there are plenty of companies that would be willing to pay $50 million if they knew their company would rebound as Ford has under Mulally. 

Questions

1.               Are CEOs and key corporate executives worth the large pay packages they receive? Explain. 

2.               Do you agree with Peter Drucker that corporate executives should receive compensation packages no larger than a certain percentage of the pay of hourly workers? Explain. 

3.               Will the Dodd–Frank Wall Street Reform and Consumer Protection Act giving shareholders the right to vote on executive pay influence the size of these packages in the future?  Explain. 

Source: Adapted from Phil LeBeau, “Mulally and Bill Ford Collect $100 Million Pay Package,” CNBC, (March 8, 2011). 

Textbook Chapter 10 Case Study 1 p. 414