CEO pay is a very complex issue that involves a lot of tradeoffs. Ford‘s Alan Mulally represents a particularly interesting situation – he is among the absolute best executives in the world right now. In the last few years his work at Ford has been truly remarkable by nearly any metric. Further, he took an incredibly difficult job (Ford was behind when he took over and was falling fast), and he was soon faced with the most turbulent competitive landscape the automotive industry has seen in the last 50 years. Both of his primary American competitors went bankrupt. Yet through this fire, he skillfully led Ford through tremendous changes and has the company incredibly well positioned to be exceptional for the next few years – even ranked as a more attractive stock than Apple by CNNMoney readers.
This is what makes the issue so difficult. Does this tremendously successful CEO deserve a big paycheck? Absolutely. Does he deserve a $55 million dollar paycheck? That is the real question. The head of the UAW, Bob King, made this distinction very clear, which highlights the moral center of this debate. He specifically said that he does not think “any human being in the world” deserves that much money. This raises questions that business schools, boards of directors, and society at large need to contend with – do we believe that epically-large pay packages are morally responsible? Everyone agrees that long-term oriented pay packages are ideal for CEOs, as they help to solve the agency problem inherent in large public organizations by effectively aligning the CEOs interests with the interests of shareholders. However, the academic literature has shown that long-term contingent pay can be effective even if it does not involve incredibly large absolute dollar amounts. With this in mind, Bob King may be right – enormous pay packages might not be morally right. But I can assure you that until CEO labor markets adjust to bring down these huge pay packages, the best people (Alan Mulally included) will be tempted to go to organizations where they can get the best rewards for their talent.
I think this is where Notre Dame has the opportunity, and maybe the responsibility, to be a voice at the center of the debate. Given our vision to help corporate America have the courage to Ask More of Business, we need to help influence leaders and especially boards of directors to make more responsible decisions that embrace long-term contingent pay without falling victim to the easy way out of rewarding great leaders with exorbitant packages just because they feel like everyone else is doing so. Further, market leaders like Ford could use this as a ‘teachable moment’ to show their peers that truly amazing talent can be fairly compensated with large but not excessive pay packages even in the face of epic leadership we might be able to get closer to making this a reality.
For more, also see the press release Notre Dame put together about my comments: ND Expert. I also had the opportunity to speak with Jack Nerad on his nationally syndicated radio show about these issues more broadly. The interview should be airing in the next few weeks: America on the Road.