'Accountability starts at the top:' Senior Ford execs to see bonus cuts

Senior-level managers at Ford Motor Co. will see reductions to their annual bonuses following a 2022 earnings report that CEO Jim Farley said "fell short" of the company's potential, The Detroit News has learned.

Each year, the Dearborn automaker establishes companywide targets for its Annual Incentive Compensation Plan, or AICP. The company's performance on those targets is used to calculate a global Business Performance Factor, essentially a multiplier that goes into determining bonus payouts. For 2022, the company exceeded those targets and that factor was set at 148%.

Ford posted $10.4 billion in earnings before interest and taxes last year, a key profitability metric, and factors such as service warranty improvements and strong operating cash flow drove the company to hit the targets used to determine employee incentives. But overall, executives — as well as investors and analysts — weren't pleased with Ford's 2022 financial performance.

The dissatisfaction among investors was reflected Friday in the automaker's stock price, which closed down 7.6% to $13.23 in New York.

Most of the company's salaried workforce will have their personal bonus targets multiplied by 148%. But upper management will see their performance factor reduced to 90%, a move aimed at fostering accountability, according to a letter to employees obtained by The News.

"This decision was not made lightly, but accountability starts at the top," CEO Jim Farley and Chief Financial Officer John Lawler wrote in the note. "Our senior leaders have a significant impact on driving the business results and must live up to the high standards we need to create a vibrant, profitably growing Ford."

The move applies to those categorized as "LL3" and above, which are leadership-level employees.

In the letter to employees, Farley and Lawler referenced Ford's 2022 earnings, which were reported Thursday and showed the automaker posting a $2 billion net loss and missing its guidance on earnings before interest and taxes by $1 billion. EBIT came in $1.1 billion below the automaker's guidance of $11.5 billion.

Executives chalked the results up largely to issues around cost, quality and supply-chain management.

“Our fourth-quarter and full-year financial performance last year fell short of our potential. And while we generated cash flow, we left about $2 billion in profit on the table, due to cost and especially continued supply chain issues," Farley told analysts Thursday. "To say I’m frustrated is an understatement because the year could have been so much more for us at Ford.”

The 148% Business Performance Factor, per the letter, was driven by Ford's strong operating cash flow in 2022 and net improvements in its quality objective.

"However, the reality is we still have a lot of work to improve execution and strengthen our business, as demonstrated by our earnings results," Farley and Lawler wrote. "We are committed to fostering a culture of excellence, and taking accountability when our overall performance doesn’t meet expectations — our own and those of our stakeholders."

The companywide performance factor is not the only metric used to determine bonuses. Personal performance also is a factor, among others, so payouts vary by employee.

In explaining the earnings miss to analysts and the bonus calculations to employees, Farley and Lawler emphasized that they believe Ford has the right strategy and is making progress, but still has work to do in areas like improving quality and taking costs out of its industrial system.

A year ago, Ford paid bonuses to top executives and lower-level salaried employees at 108% of their targets, while mid-level managers received 135% payouts.

Crosstown rival General Motors Co. earlier this week confirmed that it lowered the percentage in the performance plan payout the automaker uses to determine a salaried employee's bonus payout this year. The percentage this year is 158%, down from last year's 200%.

Meanwhile, eligible full-time hourly workers at Ford will receive up to $9,176 in profit-sharing bonuses for 2022, the company said Thursday.

The Dearborn automaker employs about 56,000 hourly workers in the U.S. Profit-sharing checks to eligible workers will be distributed in early March.

Per the automaker's contract with the United Auto Workers, the payouts are based on pretax earnings in North America for the previous calendar year. For every $1 billion in adjusted earnings before interest and taxes, eligible UAW members at Ford plants and other facilities receive $1,000. In North America, Ford reported pre-tax earnings of $9.2 billion in 2022.

Last year, eligible hourly workers at Ford received up to $7,377 in profit-sharing based on 2021 results. 

GM, which reported $9.9 billion in profits last year and met its guidance for the year, said earlier this week it will pay its 42,300 eligible hourly workers a record $12,750 in profit sharing.

jgrzelewski@detroitnews.com

Twitter: @JGrzelewski