In the aftermath of the collapse of the financial markets and the auto industry's taxpayer bailout, General Motors (NYSE:GM) then-CEO Dan Akerson was criticized by government auditors for his compensation package, which included $1.7 million cash and $7.3 million in stock. It was "excessive" beyond what was permissible under guidelines established by the Troubled Asset Relief Program, even if it was low by industry standards. Fiat Chrysler's CEO, for example, got more than $22 million in 2012, albeit from two auto companies.
Excessive compensation, in whatever form, is a concern because it misallocates resources, risks destroying shareholder value, and inhibits the company from paying line workers appropriate wages.
Deep pockets to fill
In its recent survey "The 100 Most Overpaid CEOs," shareholder activist group As You Sow sought to quantify the disparity of compensation practices at companies in the S&P 500. By combining statistical analysis with an in-depth look at more than 30 "red flag" indicators such as returns on assets and invested capital, stock option and equity grants, pay above peers, sustainability, and third-party rankings from organizations like Institutional Shareholder Services and Glass Lewis, As You Sow came up with a list of the worst offenders.
Though companies often justify their exorbitant salaries by saying they're paying for performance, the shareholder activist group indicates there is virtually no correlation between CEO pay and shareholder returns.
Tesla Motors co-founder Elon Musk might be a case in point. He received $78 million in 2012, largely due to stock option awards, while the following year he received just $70,000. Of that amount, he accepted just $1. Yet between its 2010 IPO and last Friday's close, Tesla's stock has appreciated 700% compared to a simple doubling in value of the S&P 500 index. Apparently, a stock can do well even when its executives get workman's wages.
Of course, Musk is an otherwise wealthy man, and no one is saying executives shouldn't accept their salaries, or even be well paid for the job they do. It's only when companies lavish pay and benefits on CEOs beyond reason or proportion that they become the target of activist and shareholder ire.
Driven to succeed
The automaker that As You Sow identifies as paying its CEO the most is Ford Motor Company (NYSE:F). Former CEO Alan Mullaly received $23.2 million in total compensation in 2013.
The Blue Oval came in at No. 17 on the shareholder activist's top 100 list, behind such luminaries as ExxonMobil's Rex Tillerson at No. 13, with $28.1 million, but well ahead of Marillyn A. Hewson at defense contractor Lockheed-Martin, who ranked 32nd, with $25.2 million in total compensation. General Motors' CEO, Mary Barra, received $14.4 million in total compensation for last year, and didn't crack the top 100 list -- making Ford the only automaker on it..
As You Sow also found that if pay had been really based upon company performance, executive compensation would have been greatly reduced. Mulally's pay would have been around $10.8 million less than what he actually received, while Tillerson would have received $16.3 million less. Hewson, meanwhile, was found to have received $13.3 million in "excess pay."
Maybe it's not all about the stock
Some might reasonably counter that Mulally's pay at Ford was fully deserved. Maybe it was fortuitous, but he had the foresight to take out a big "$23.5 billion home improvement loan," as he called it, ahead of the financial crisis that got the automaker through the worst parts of the economic downturn. It allowed Ford to avoid being bailed out by taxpayers, and helped the automaker turn profitable again in 2013, when it earned $7.2 billion.
Of course, Mulally retired last summer as Ford's CEO and was replaced by the company's COO, Mark Fields, so it's not likely Ford will be making a repeat on As You Sow's survey next year. Even with the 33% raise Fields received with the promotion, his total compensation in 2013 was $10.2 million, including stock grants and options.
For 2014, Fields was to be paid a salary and bonus of as much as $5.3 million, along with some $3 million in stock options. As Gary Hewitt, the compensation analyst at GMI Ratings, told Bloomberg last year, "This is not jaw dropping for the executive compensation world."
Even after Ford's disappointing effort in 2014 that saw profits cut in half after fourth-quarter earnings were almost completely wiped out, investors would still probably give the automaker the benefit of the doubt. The results were still better than analyst expectations, and with the prospects for continued improvement in Europe, where losses are already narrowing (Ford says it will be profitable next year), investors are willing to wait to see it return to form. Shares of Ford have risen 26% from the lows they hit back in October.
No longer up on blocks
For an industry and a company that were on the brink of oblivion, former Ford CEO Alan Mulally's proven ability to turn the automaker around and drive it to profits -- and an overall stronger financial position -- means you won't find too many investors upset with what the company paid him. With his successor being paid more or less in line with the rest of the industry, Ford's reputation for bestowing excess compensation on its executives is probably at an end for the foreseeable future.