“The truth is… never simple” (Oscar Wilde)

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Expert Perspective by Grahall’s Omnimedia Editorial Board

A March 23, 2010article in Free Press (freep.com) by Brent Snavely (Mulally compensation hits $12.87M at Ford Union angry about white-collar pay) got our Editorial Board talking.

Snavely says: “Ford President and CEO Alan Mulally’s compensation of $12.87 million in 2009 might look unreasonable to some, but it is based on smart executive compensation practices, experts say.”

Snavely quotes Daniel Moynihan, principal of Compensation Resources saying of Mulally’s compensation: “It looks like they have a true pay-for-performance package there. Their stock price is doing well, and his fixed compensation went down.”

Yes, Ford did very well in 2009 as compared with other car companies and some other companies in other industries. And to its credit, Ford did it without the need for government support. But it is simplistic to compare Mullaly’s compensation and Ford’s stock price and conclude that it is ”true-pay-for-performance.”

Let’s start with a little history of Mulally (from Ford’s web site)

“President and CEO, Ford Motor Company, joined Ford in 2006.  Alan Mulally is president and chief executive officer of Ford Motor Company. He also is a member of the company’s Board of Directors.  Prior to joining Ford in September 2006, Mulally served as executive vice president of The Boeing Company, and president and chief executive officer of Boeing Commercial Airplanes. In that role, he was responsible for all of the company’s commercial airplane programs and related services.”

A September 6, 2006 article in Time Magazine (Ford Motor’s New Chief: “I Think It’s a Tough Situation”)  said those were “…desperate times in Dearborn. Since 2001, Ford Motor ha[d] suffered more than $9 billion in losses from its North American auto operations… Ford’s market share in August [2001], 16.8%, was the second lowest on record. Sales of pickup trucks and SUVs, Ford’s only major profitable segments, ha[d] plummeted in the last year, hit by high gas prices and stiff competition from GM and Toyota… Any way you slice it, Ford [wa]s shrinking fast.”  The 2006 article ended with this dim prediction” … it may be years before the company consistently posts profits again.”

That was a tough situation for Mulallay to enter.  And here is how it played out (from Morning Star, data through March 26, 2010):

Total Returns %     2006 2007 2008 2009 YTD
Stock 0.5                -10.4 -66.0 336.7 38.6
Industry -28.4 -2.7 -20.8 302.6 37.1
S&P 500 -13.1 -13.9 -27.5 313.2 34.0

Well it can take some time for things to turn around and in Mulally’s case it took until last year when he kicked the proverbial “A” of both the industry and the S&P.
 
The mistake made by many people is to observe a CEO’s pay in a “one year” or some other narrow time frame.  As an executive with substantial variable pay leverage, the CEO’scompensation will rise and fall with the success of the company.  Based on the current environment for auto makers as well as other heavy manufacturing companies, this may very well make sense as far as executive compensation strategy.   However, it is important to remember that the goal of senior executives, and particularly the CEO, is to position the company for success over a long period of time, 5 years or 10 years or even longer.  Variations in share price on a year to year basis can distort an understanding of the compensation strategy.  Accepting this variation as a basis for policy is simplistic.   

Here is a good way to look at it.  If you take a video of a horse galloping, and then look at individual frames, there will be situations where all the horse’s hooves are off the ground.   One would not be wise to assume from this limited data that horses can fly.

So does that make Mulally’s pay right or wrong or what?

One way to get a bench mark for Mulally’s pay is to look at Ford’s peers and how much those CEO’s are paid.   But given the number of direct competitors in the US, this wouldn’t yield many observations. Accordingly  Ford’s actual peer group (according to their proxy) is an amalgam of well-known companies, not just auto makers including 3M, Coca Cola and others large industrials.

A simple reaction might be to say “WAIT!  WHY NOT JUST OTHER AUTOMAKERS?” Ford is not in the soda pop or adhesive tape business  But here is something to consider (and not just in Ford’s case).  Mulally did not join Ford from another car company.  He came from Boeing and could perhaps go back there or with his success at Ford established, go on to many other manufacturing companies with businesses far different from auto making.  And therefore Mulally’s compensation benchmark groups may not properly be limited to just automakers.  Nor can it be ignired that he could be wooed to another company inan industry better positioned than automotive.
 
Is Mulally’s compensation “right”? Well, Fords Board of Director’s thinks so.  What we hope for Ford’s investors is that the compensation strategy is not a single year view.

Contact Grahall’s OmniMedia Editorial Board at edie.kingstonaa2grahall.com

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