Was Boeing’s Compensation Committee Sufficiently Independent in Judging the Business Risk of the 737 Max?

Abstract

Boeing’s 2011 launch of the 737 Max has been a disastrous decision for the company and could even threaten its long-term viability. In the 2011 letter to shareholder, the CEO said it will “reduce our business risk substantially for the next decade.” The CEO also convinced his compensation committee to factor “risk reduction” into its measure of economic profit and company performance score. Consequently, CEO pay rose from less than $20 million in the two years preceding 2011, to over $26 million in the three years after 2011. Coincidentally, the CEO was a long-term veteran of General Electric, as were two of the four members of the compensation committee. This case study illustrates that management can capture the compensation committee and put into place compensation incentives that can harm the company in the long-run.