Chrysler Board Cuts Bonuses of Top Execs, Cites Lag in Quality

Despite robust earnings last year, Chrysler Corp. revealed Thursday that its board of directors cut the yearly bonuses paid to the company’s top 1,950 executives by 18% because of lagging vehicle quality.

Chrysler’s managers are eligible for annual bonuses based mainly on meeting profit targets, but performance in meeting other goals is also measured. The company earned $2 billion in 1995, surpassing the financial target set by the board.

But the board lowered the bonuses to top executives “based on the corporation’s performance in some measures of total vehicle quality and excellence,” according to Chrysler’s annual proxy statement filed with the Securities and Exchange Commission.

The board’s action reflects the increased importance Chrysler’s directors and top management have placed on quality, which has long been cited as the company’s Achilles’ heel.

The board’s compensation committee, made up of three outside directors, said the company had made great strides in quality but that there is room for improvement, particularly in customer service, initial quality rating and warranty expenses.

“This is not an issue of our quality didn’t get better,” Chrysler spokesman Steve Harris said. “We just didn’t reach the tough stretch goals we set.” He said Chrysler made double-digit percentage improvements in nearly every gauge of quality last year.

Indeed, although the auto maker still lags rivals in several key areas, it has made measurable improvement in quality, according to J.D. Power & Associates, an Agoura Hills consultant that conducts auto quality studies.

Companies are increasingly using quality and customer satisfaction to help determine executives’ compensation, according to David Leach, who heads the executive compensation consulting practice for Compensation Resource Group in Pasadena. Chrysler began doing it in 1994.

The bonus reduction was applied across the board to all top managers, including Robert Eaton, chairman and chief executive, and Robert Lutz, president and chief operating officer.

Eaton received $4.2 million in salary, bonus and other compensation in 1995, nearly a third less than the $6.2 million he earned in 1994. Lutz was paid $4 million in salary, bonus, stock options and other compensation last year, up from $3.4 million the year before.

The decline in Eaton’s compensation occurred mainly because he did not exercise any stock options last year. In 1994, he cashed in shares worth nearly $1.9 million.

Last year, Eaton was paid $1.2 million in salary, $2.4 million in bonuses, an additional performance-based payout of $434,981 and other compensation of $163,000. He was also given options on 225,000 shares, worth $3 million at today’s prices.

Lutz’s salary was $881,250 in 1995. He also received a bonus of $1.7 million, a performance-based payout of $278,231 and other compensation of $107,000. He also cashed in stock options worth $1.1 million. Lutz was given options on 100,000 shares in 1995, worth about $1.4 million.

Eaton and Lutz are credited with revitalizing Chrysler in the last three years. Analysts say the company has the most exciting lineup of new vehicles and is the lowest-cost producer among the Big Three.

Chrysler’s management is credited with ably resisting the hostile takeover attempt last year by billionaire investor Kirk Kerkorian. The firm won broad institutional shareholder support by raising the dividend several times and increasing its share buyback program.

Times staff writer Martha Groves contributed to this report.