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Source: Corp! Magazine - March 2004, Michigan Edition
Article: Time to Change Executive Compensation

Are American Automakers losing market share because of the way they compensate the executives? As the old adage goes, "Tell me how you’re going to measure me, and I'll show you how I'm going to perform."

American Executives always focused on a lot on quarterly earning, but it became an obsession in the 1990s. That's because the board of directors in Detroit (and Corporate America) decided to change how they reward executives. They placed more emphasis on creating shareholder value, dangling out the prospects of huge financial rewards of they hit big numbers.

It took about a nano-second for these executives to get the message. They snapped to, saluted and got to work.

"You want us to cut the cost of capital? No problem! Quick, let's outsource as much as we can, which is the fastest way we can transfer capital costs from our books onto our suppliers."

"You want us to immediately boost earnings? Easy Breezy. We'll cut costs ruthlessly. We'll squeeze our suppliers until they cough up every red cent. Then we'll box out engineers into budgets that will prevent them from spending money on modern powertrain technologies, or on high quality materials for the interiors on our cars and trucks."

Meanwhile, executives at Toyota, Honda, and BMW were never paid rock-star wages. Sure, they have tight financial controls, but their primary focus was never shareholder value.

So which approach do you think is producing greater shareholder value? Toyota's market capitalization is worth more than General Motors, Ford, and Daimler Chrysler combined!

The message is clear. It's time for Detroit (and Corporate America) to change how it compensates its executives.

First, measure their performance against what really matters. How about quality?

Can you imagine what would happen to the Big Three vehicle quality if Rick Wagoner, Nick Scheele and Dieter Zetche woke up every morning knowing the only way they could make millions of dollars in bonuses would be if the quality of their vehicles shot up?

They'll argue they already do that. But the metric they use is what they call Initial Quality, and that only measures how cars perform in the first 90 days of ownership.

Instead, let's take a long-term look at quality, and include related issues like residual values and sales incentives.

How about productivity? How much more attention would management devote to making their companies more efficient if their bonuses were tied to it? And market share?

The idea here is to get management focused on the metrics they can control; the metrics that will directly improve the company and its products. Let's face it. When the stock market tanks, all that shareholder value effort is a waste of time.

Here are some suggested points to pay management a bonus: Quality, productivity, market share, profits and shareholder value. In that order.

Notice that I didn't get rid of shareholder value. Creating shareholder value is important. But it should not be the Number One criteria by which management is measured.

The old saying holds true. Tell management how you're going to measure them, then sit back and watch them do what you want. I guess I could add something here about operant conditioning, B.F. Skinner, rats in a maze, and rewards of cheese. But people may object to the analogy.

Overall, chief executives compensation has been soaring in recent years. Richard Grasso, the former head of the New York Stock Exchange, was ousted recently when it was revealed that his annual package salary plus bonuses had totaled more than $100 million dollars. An anomaly? Certainly, but eight figure annual compensation is becoming more frequent.

An historical measure of the appropriateness of executive pat has long been the ratio between the lowest worker’s salary and that of the chief executives. Almost a century ago, J.P. Morgan, one of America’s wealthiest men, proposed that executives earn no more than 20 times the pay of low level workers. How times change: A recent study revealed that the chiefs at big domestic companies earned 531 times what their hourly employees did, on average! And as you can see from the table below, Americans lead the world when it comes to executive pay as a multiple of employee average:

* United States: 531
* Brazil: 57
* Mexico: 45
* Britain: 25
* Canada: 21
* France: 16
* Germany: 11
* Japan:10


American CEO pay grew while profits and stocks declined. Median pay went up 6%, while Corporate profits dropped 4%, and share prices dropped 23.4%.

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At 60 of the worst-performing companies in that group, which lost $769 billion in market value over the past five years, the aggregate pay for the top five executives of those 60 companies over the same period was $12 billion.

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You show me one line worker for teh Big 3 that is "barely feeding his family". Theses are people who make 50K working 40 hours a week....some are over 100K with overtime. I'm not saying they don't deserve it, but stop making it sound like the line workers are some poor shlubs who are defaulting on mortgages. I personally know of several line workers who live in houses that cost upwards of 600K....and I'm not sure where you got your numbers, but 10% of profits go to CEO's? I think you are seriously exaggerating that number.

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now when you are cutting down the CEO's who actually make the company work and operate, you are being anti American workers. those people matter alot, and they are American workers. stop trashing them because you are to much of a failure at life to become one.

as much as i would like to blame fords **** models, the real problem is the UAW. between health care and the overpriced workers they are actually running those workers jobs into the ground.

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ORIGINAL: jgralka

SO what does 50k buy you... About a 150k house and maybe a 15k car. Wow the extravagance.

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ORIGINAL: jgralka
Right a guy making 50k a year is living in a 600k house. Please. I can barley afford my house with my "50k" a year working for Chrysler. And my wife works as well. There is no way I could afford my house and my cars without her working. SO what does 50k buy you... About a 150k house and maybe a 15k car. Wow the extravagance.

Nick as usual your showing your stupidity here. I would really like to see you do a line job. then see how "overpaid" we are. Also why is it that the transplants(honda, nissan, toyota) can pay their "overpriced workers" the same, and sometimes even better than the big three and make a very hefty profit. Your argument holds no ground. They pay the same, and make a ton of money doing it, but the big three's problem is the UAW. Okay. Check your facts before you make yourself look foolish.

P.S. Its a two way street, without us they(ceo's) have no job as well. So it goes both ways.

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ORIGINAL: Frenchy
It's only gay if you cum.

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ORIGINAL: BadStratRT

well, if there is no "side money", he has to have either worked for ages and saved every cent, come upon some money, or be up to his neck in debt...?

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i dont care what BS you wnat to say, i still think ti is more of the UAWs fault then fords.

P.S. it isn't a 2 way street, because any high school drop out or community college graduate could do a line job and be very happy bringing in 50k a year. CEOs require an education, so they are in no way easily replaceable like line workers. almost any 18 year old who isn't getting a real college education would probably jump at the opportunity to make $12+ per hour

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Hmmm... My good friend makes like 20k-30k and has a 15k car and 25k car and a 120k house and his wife doesn't work... I wonder how he does that...