Are the auto industry's top executives overpaid?
By: Dr Peter Wells, Tuesday, September 15, 2009, AutomotiveWorld.com
This week saw the publication of the long-awaited report into the demise of MG Rover in which much attention was given to the salaries paid to the so-called Phoenix Four. Compared with some of the astronomical amounts paid in salaries, bonuses, share options and fringe benefits in the banking and financial services sector before, during and even after the global meltdown of the financial system, the Phoenix Four were mere dilettantes. But the underlying issue is one of profound significance for all senior executives in the automotive industry: are they worth it?
Of course, the theory is that high rewards are necessary to attract the most talented executives, to compensate them for the risks and difficulties of the work and to give a share of the wealth they play a critical role in creating. That is the theory. The trouble is, as the case of the Phoenix Four amply demonstrates, all too often fabulous rewards are garnered by individuals in the face of what can only be described as chronic failure.
The automotive industry is certainly not alone in this problem, but neither is it immune. The problems are often compounded by the presence of a CEO or Chairman of a particularly forceful and visionary personality. Sometimes such an individual can be pivotal to success, with Jack Welch at GE probably the paradigm example. Perhaps Carlos Ghosn at Renault-Nissan is another. Generally, however, ambition eventually surpasses ability or the objective grasp of reality.
A classic instance was the debacle of the creation of DaimlerChrysler and the critical part played by Daimler Chairman Jürgen Schrempp, who in the mid-1990s termed the 'Welt AG' plan under which the company would seek a dominating role in the key market regions of the world through a series of mergers and alliances including Chrysler, Mitsubishi and Hyundai. Paradoxically, the strong leadership of Schrempp could have been the cause of the merger failure as he took the company into a series of relationships that the rest of the management found difficult to make operational.
While the major financial institutions and corporate lawyers, along with the senior management teams involved, tend to be well-rewarded in the short term by mergers and acquisitions, in the longer term the corporate benefit is much more doubtful. In 1998 Daimler paid US$36bn for Chrysler; while in 2007 it sold the majority of the business (80.1%) to Cerberus Capital for just US$7.4bn, having endured major losses in the previous two years and a collapse in share price. Dieter Zetsche, chief executive of DaimlerChrysler at the time, reportedly said: "We obviously over-estimated the potential synergies."
Perhaps similar observations could be made with respect to other individuals who have in one way or another failed to live up to expectations in terms of corporate performance or whose strategies were eventually exposed as being critically flawed. Examples in their different ways include Jac Nasser at Ford, Wendelin Weideking at Porsche and Rick Wagoner at General Motors. They could all potentially claim to be victims of circumstance, but even this emphasises another problem: when times are good then top executives are happy to take the credit; when they are bad then 'external factors' are always to blame.
There is now a growing current of resentment at the continued expansion of senior executive pay, in all sectors of the economy. As privation and austerity result in restrictions in salary increases for workers, and indeed in growing redundancies, so it is incumbent upon the industry to ensure that its own practices are clear and defensible. Avarice, even when strictly legal, is rarely attractive and can be deeply damaging to corporate morale. It is true that Weiderking was held in some awe by his workforce for his genius in transforming the fortunes of Porsche, but that alone was not a guarantee of future success.
Now that the industry is deeply dependent upon the public purse, and that in the wider economy there is genuine hardship, the leadership of the automotive industry would do well to show a degree of humility and restraint.
Dr Peter Wells is a Reader at Cardiff Business School, where he is a Co-Director of the Centre for Automotive Industry Research and leads the automotive industry research programme within BRASS, also in Cardiff University. Dr Wells is also a director of AutomotiveWorld.com's sister website AWPresenter.com. He can be contacted on wellspe@cardiff.ac.uk.
The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.
Published on Tuesday, September 15, 2009
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