Nice Work If You Can Get It

Ford Motor Company paid its CEO Alan Mulally $39.1 million for four months work at the end of 2006. Ford lost $12.7 billion during 2006, with a disproportionate share of the loss ($5.8 billion) coming in the fourth quarter, when Mr. Mulally was in charge.

My, it must be nice to get paid almost $40 million to help your company lose almost $6 billion.

I'm not offended by high salaries per se, as long as they're determined by arm's-length negotiation. When a baseball player convinces a team to pay him multi-tens-of-millions of dollars, I know that team's owner fought the player hard and had the strongest possible interest in keeping the salary as low as possible. That's the owner's money on the line. If the player turns out to be a flop, it's the owner's fault for making a bad decision. It's not anyone else's business.

But when a public company's CEO gets paid eight figures for losing ten figures, I am aghast. The fundamental problem is that the CEO's pay is not determined by pure market forces. The CEO and the corporate board know that they are sitting on a huge pile of other people's money and that no one is really watching what they do because no one has the right incentive.

You might think that Ford stockholders would be boiling over at this kind of salary. But no stockholder has a big enough stake. I own some Ford stock through mutual fund investments (if you've got anything in an S&P 500 index fund, you do too), but I don't have anything like a substantial stake in Mulally's salary, and you don't either.

Ford has 1.8 billion shares of stock issued. Ford closed at $8.08 today, so even if you had $1 million invested in Ford stock (which would be a huge amount compared to what I have, you can be sure), you'd own a whopping 0.0069% of Ford -- less than one one-hundreth of one percent. At that rate, Mulally's salary is costing you about $2,700. That's just not that much compared to your investment. If your portfolio is so big that you've got $1 million invested in Ford stock, you're not going to be fighting hard about $2,700, especially since, if you did, the main beneficiaries would be the other shareholders who own the other 99.99% of the company.

CEOs and corporate boards like to claim that there's a tight market for CEO talent and that they have to pay these outsized salaries to get the best top management. I would believe it if the people setting the salaries had the right incentives. Instead, they're just playing with other people's money and somehow seem to have lost all sense of shame in grabbing as much of it as possible.