Question.1634 - Case Study 1 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 382improvements 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 Millio n Pay Package,” CNBC (March 8, 2011).
Answer Below:
The worthiness of large pay packages for CEOs and key corporate executives is a contentious issue with various perspectives. Proponents argue that high executive pay is justified if it reflects their contributions to the company's success. In the case of Alan Mulally, his leadership in steering Ford away from bankruptcy and significantly improving shareholder value could be seen as justifying his substantial compensation. Additionally, executives often bear immense responsibilities and risks in making critical decisions that affect the company's future. Peter Drucker's perspective suggests that there should be a reasonable and justifiable relationship between executive pay and the compensation of hourly workers. This viewpoint is rooted in the principle of fairness and maintaining a balanced distribution of rewards within an organization. Supporters of this idea argue that it aligns with the notion of shared prosperity and prevents excessive wage gaps. The Dodd-Frank Act's provision that gives shareholders the right to vote on executive pay, known as "say-on-pay" votes, aims to enhance corporate governance and accountability. While these votes are not legally binding, they serve as an avenue for shareholders to express their opinions on executive compensation. This mechanism can create pressure on boards of directors to align executive pay with performance and shareholder interests.More Articles From Human Resource
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