Incentive Plans
Essay Preview: Incentive Plans
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Many companies today have implemented incentive plans in an effort to improve employees satisfaction and enhance the overall productivity of the organization. Incentive plans provides several advantages to a competitive organization. They are directly related to operating performance. Hence, helping employees to focus on specific performance targets and to feel motivated which can create gains for both the employees and the organization. It also works as a way to apportion success to the ones responsible for the general success of the company by rewarding top performers as a form of appreciation and acknowledgement of their effort. In this sense, it also increases equity and justice in the organization, as the people who are working harder have the potential to be recognized for it. Furthermore, when payments to individuals are based on team results, it encourages solidified teamwork and unit cohesiveness.
There are many forms of incentive plans as targeted to different employees. Our case focuses on the incentives provided to executives such as CEOs. The case explains how during the financial crisis, the U.S. auto industry was among the ones that took the hardest hit and many executives pay was reduced or even withheld; however, there was one big exception. In 2011, the CEO of Ford, Allan Mulally, was to receive $56.5 million in stock awards, an event that shocked many people. Many shareholder groups, union leaders, political officials, and the general public were already demanding a change in the way auto industry executives were getting rich while their cars were losing value. Therefore, such reward became a very controversial issue, which people have very different opinions on. Many argue that it is unreasonable that a boss would make more than 1,000 times the pay of their average worker. However, some Ford workers who have seen Mulally steer Ford back from the edge of bankruptcy might think differently. Ford shareholders would unlikely overlook the fact that Ford shares have gone from $1.56 to $14 a share since Mulally first took over. Furthermore, no one could really know what would have happened to Ford if Mulally did not take over. National economic recovery could have had an influence, but then again, many companies would be willing to pay $50 million if their company could rebound as Ford did under the leadership of Mulally.
The question becomes whether key corporate executives are really worth the large pay packages and incentives they receive. Corporate compensation committees validate these big bonuses in the following ways. They argue that (1) large financial incentives are a way to reward superior performance; (2) business competition is pressure-filled and demanding; (3) good executive talent is in great demand; and (4) effective executives create shareholder value. In this sense, the case of Ford and Mulally definitely meets all of these criteria. Mulallys contribution to the company is without a doubt remarkable. Although there were initial mixed opinions on whether Mulally could achieve a successful turnaround at Ford Motors and put the company back on the profit track by 2009, he definitely proved them he could. Not only did he take shares value from $1.56 to $14 a share, but he also helped Ford earn $29.5 billion in the last three years after $30.1 billion in losses from 2006 through 2008 (Bloomberg). Therefore, superior performance was clearly demonstrated through his several accomplishments, and so he deserved to be rewarded.
Companies award stock ownership to their executives for the main purpose of providing senior managers with a significant stake in the success of the business, so that their fortunes will rise and fall with the value that they create for shareholders. Businesses also tie rewards to these performance results, particularly over the long term, and Ford is not the exception. Ford spokesman Jay Coonney said in a statement in March posted in Bloomberg: “Our compensation philosophy is to align the interests of our leadership with those of our shareholders. To do this, we put the vast majority of their compensation at risk through performance-based grants. Fords stock was $1.96 a share at the time of the 2009 awards, and is over $12 a share today. That is a more than a 500 percent increase, which benefits all stakeholders in the Ford turnaround.” As we see, Ford is attempting to encourage high management performance by attaching Mulallys pay to the results of his success and recognizing the fact that the value of all shares rose due to his performance. Moreover; such incentive plan is also useful to retain key executive personnel that have proved to be essentially important to the company as it is Mulally. As we see, Ford had many motives to provide these long-term incentives to Mulally.