Executive Compensation Research

Given these crucial roles to a company, it is important to understand aspects regarding executive compensation. Executive Compensation Philosophy Ford Motor Company’s executive compensation philosophy is one of the key pillars that provide the foundation within which the company develops all its compensation and benefits programs. The philosophy is consistently applied across all the company’s executive salaried employees. In this regard, the objectives of Ford’s executive compensation programs are to: • Align the executive compensation with shareholder value • Focus the executives on delivering balanced performance by providing (I) both annual and long-term incentives and (ii) both equity and cash incentives. • Attract and retain high-performing executive talent. Assessing the CEO’s Performance Ford Motor Company understands that the adoption of a more structured, formalized approach to CEO assessment gives the company’s board a higher likelihood of optimizing its relationship with the CEO while improving the company’s overall performance.

Given that Ford is a future-oriented company, the assessment of the CEO’s performance takes the perspectives of the past elements of the CEO’s performance, the present impact, the future ability to impact the company’s performance. By looking backward, Ford’s assessment process of the CEO’s performance focuses on the accountability and rewards of the past performances. On the other hand, by looking forward, the company evaluates the future objectives and the CEO’s possession of strategy, vision, and personal capabilities to achieve those objectives. From this context, the CEO is assessed on the factors of the company’s financial health, the CEO’s operational impact, and the leadership effectiveness. The CEO’s level of compensation at Ford is about 180 times the average employee’s salary at the company.

While the level of compensation could reflect the supply and demand of talented and experienced executives in the market, the disparity gap between the CEO’s compensation and the average employee’s salary at the company is too wide. According to Bolton, Mehran, and Shapiro (2015), the high levels of compensation for CEO’s in some large corporations tend to be a reward for factors outside the CEO’s control. Some of these factors out of the CEO’s control include the change in the price of key commodities or favorable business cycles (Bolton, Mehran & Shapiro, 2015). In the case of Ford Motor Company, the CEO’s total compensation increased despite a drop in the company’s profits. The equity grants align with the stockholder interests from the perspective that equity-based compensation is tied to the company’s performance and the future value of the company’s common stock.

Equity grants to the executives of a company encourage the executives to focus their decisions and actions on the long-term interests of the company because today’s business decisions affect a company over a number of years (Lin et al. As such, when a large portion of a CEO’s compensation is equity-based, the CEO becomes more focused to the core business goals of increasing the stockholders’ wealth with the knowledge that he or she is one of the stockholders. In short, making a large portion of the executive compensation as equity-based enhances the alignment of the executives’ interests with the interests of the shareholders. Total Shareholder Return (TSR) Just like most corporations, Ford Motor Company uses Total Shareholder Return (TSR) as an indicator of “fairness” in executive pay.

Alternative metrics include the use of earnings per share and return on capital. Section 162(m) of the Internal Revenue Code Section 162(m) of the Internal Revenue Code is a Practice Note that imposes a limit of $1,000,000 on the amount of deductible compensation that a corporation can pay to its chief executive officer, chief financial officer, and other three most highly paid executives. Before 2018, there were two main exceptions to the limit amount deductible. The exceptions were for commission-based pay and the performance-based pay. However, after the singing of the Tax Cuts and Jobs Act of 2017 into law, these exceptions were revoked. The regulation under the Dodd-Frank Act will mandate corporations to disclose their compensation structures. The disclosure will give a more accurate sense of the CEO-to-worker pay gap (Marino, 2016).

The disclosure will control executive compensation because it will add to a number of considerations for CEO’s compensation. For instance, in setting the compensation for CEOs, companies will consider how the public will react to the resulting CEO to employee compensation ratio. The companies will be worried about how the employees will react to the ratios. Therefore, the “say on pay” rule will be beneficial in controlling executive compensation. Personal Take-Away The assignment was insightful in enabling a comprehensive understanding of the concept of executive compensation. It has influenced me to develop a perspective of executive compensation beyond the objectives of attracting, motivating, and retaining talented executives. I have learned that executive compensation directly influences the long-term performance of a company.