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"Hucksterism" at Delphi: Top Execs Rewarded While Workers Getting Screwed
Share / Recommend - Comment - Print - Tuesday, Oct 11, 05, 9:43AM
Economist Peter Morici, with whom I used to work many years ago at the Economic Strategy Institute, has sent out a superb note outlining the "self-dealing" among top executives at Delphi, which has just declared bankruptcy.
He writes:
Delphi CEO Robert S. Miller is proposing a sweetheart severance packages for 21 top executives and improved compensation for 600 executives in the form of stock options. This is a raid on bondholders and should be disallowed by the bankruptcy court.These top managers bear considerable responsibility for Delphi's sad situation. As experience in the airline industry demonstrates extra pay for failed managers will do little to improve their performance. There is no reason to believe, as Miller claims, these executives are being paid less than they are worth right now. In fact, they are likely not worth what they are currently being paid.
If his top executives are being paid below market, as Miller claims, why have they not left Delphi already? Over the last several months, Delphi's top managers were in the best position to know the company was in deep trouble and that their future with the company was uncertain at best. Yet, they could not identify better employment alternatives?
Benchmarking against Delphi managers pay against other auto companies, suppliers and durable goods manufacturers is silly. Executive pay in the automobile sector, like blue collar pay, is more than the automobile and parts markets will bear. That is what matters.
When companies are in long-term decline, the shareholders would be best served by managers selling off assets and distributing the cash to the stockholders; rather, profitable assets are sold to sustain employment and above market salaries, and to keep uncompetitive activities going.
Consider Ford's sale of Hertz and GM's sale of its stake in Fiji. If you had a billion dollars to invest would you give it to Bill Ford or Rick Waggoner? Of course not! It follows that shareholders should not let them sell Hertz and Fuji and invest the money in Ford and GM, because they are not really investing. They are using the proceeds to support inefficient enterprises and overpaid managers and workers a bit longer.
The same goes for compensation packages at Delphi. The company has some residual value now that it is in Chapter 11. Ultimately, the extra pay for executives will come out of what goes to bond holders. That's legalized pilfering.
This is a sizeable excerpt of a longer piece. I recommend that folks contact Peter Morici directly for his full note -- and ask to be put on his distribution list.
Compare what Delphi's CEO is doing for top executives compared to the lead graph, front page, above the fold, "Business and Finance" box in the Wall Street Journal:
DELPHI'S CEO SAID the auto supplier could save its pension plan if unions agreed to work for about a third of their old pay.
There are probably deep structural reasons why Delphi is struggling -- but to reward those at the top who failed while workers struggle continues the story of outrageous 'structural corruption' in our economy.
-- Steve Clemons
morici is missing the point entirely... the point is that bankruptcy, with the tacit encouragement of bushco, is the new business strategy... under its umbrella, workers can be shed by the thousands, contracts can be gutted, unions can be broken, wages can be massively pared, functions can be outsourced, and profitability can ultimately soar, leading to that most prized of all corporate goals, making the rich richer...
It depends on WHICH rich.
A bankrupcy eliminates all stockholder wealth (which is why GM's lack-of-breakup is going to screw Kirkorian: Kirkorian's strategy was obviously force a split in the company (GMAC/profit centers from GM) and then let GM stock sink separately. But the piecmeal selloff (Fuji stake, GMAC mortgage 1/2 sold, several billion of GMAC's loan portfolio sold) makes it clear that isn't happening.
A bankrupcy may help the bondholders, if done early and well, as they get something rather than a later zero.
A bankrupcy MAY help the non-management workforce, IF the workforce is not heavily overcompensated. If the workforce IS heavily overcompensated, it really hurts.
A bankrupcy almost always will help the management. And they are the ones who make the decision
Another's comments on this:
(Robert farrago)
http://www.thetruthaboutcars.com/content/1128962357158877558/index.php
I've had the privilege of watching this process play out at a large telecom. (The one whose former head got a 25 year sentence). One only needs to read the proxy statement recently issued in support of its acquistition to see how the final raid on the corporate cookie jar occurs. Of course, in every other area (except the corporate jet fleet) spending is most austere.
I am a bit surprised that anyone would buy into the stock option thing though. If these folks are in chapter 11, there is a real high probability that any existing stock is heading towards oblivion.
Expect to see obscene dollars paid to the bankruptcy advisors and the other various and sundry ne'er do wells who are along for the ride.
One difference with the above mentioned telecom, is that all the execs had to be brought in new, so the need to pay all the extra goodies could be justified with only minor poker face skills. Doing it and keeping the same crew requires major skills in that area.
As to the bondholders getting screwed, yes that is true to a point. But don't forget, in most cases, the folks who actually vote the stuff are dealing with OPM (other peoples money). It does take awhile for the bondholders to organize. But likely, if anyone sees any possible daylight on delphi, they will pounce on delphi's now junk bonds for pennies on the dollar and try to ride it out. The bond side is strictly for the vultures at this point.
I did read yesterday that as part of the spinoff of Delphi is a provision that the GM would assume the pension liability for Delphi. So GM has a dog in this fight, as does PBGC (Pension Benefit Guaranty Corp). And of course with GM, Kirk Kerkorian is in the game.
One commentator mused that this bankruptcy could set GM on a major swoon, which might prove contagious to a broader swath of the market.
If you go back to the year 1999 you could see this freight train coming. The spin off from GM put huge amounts of debt into Delphi. This guaranteed failure because Delphi had only one customer who was essentially parasitic and no one other plan to either become its own company and provide products of any kind to anyone else. There are many companies out there like that but few with the pension and liabilty problems.
Williams Brothers is a great example. They started out as a pipeline co, began laying fiber optic along its pipelines and spun off the fiber company with debt. The spinoff quickly reached black fiber because of the new efficiencies of switching and compression of data packets. It went bankrupt and was bought pack pennies on the dollar by the orginal company.
It is only going to get worse for companies w/ public pensions. And tax payers are the ones allowing capital holders to be bailed out and saddled with the subsquent debt.
I think the GM spinoff of Delphi was designed to fail, allowing GM to dump billions in liabilities (maybe) and thousands of employees.
GM now has a perfect excuse to buy parts overseas.
Current management took jobs on a sinking ship. Smart? No. Did someone have to do it? Yes.
Executive compensation is minor in the overall scheme here. The villain is GM (aided and abetted by the UAW).
I can't believe that the upper crust is still giving out bonus's while we sink, I would love for someone to take away his job, pension, and all that he's worked for and then see how he feels about cutting wages,I guess it's true that the rich keep getting richer. I hope he sleeps well at night!
Nice post. Wanted to note that your former colleague Morici's commentaries are regularly available on this Irish finance site:
http://www.finfacts.com/irelandbusinessnews/publish/article_10003589.shtml
CLASS WARFARE !! How dare you! I've got lots and lots of money and the last thing I want is low class people trundling me off to a guillotine. Please, NO CLASS WARFARE TALK. You endanger the your country's best and brightest.
And Bloomberg's Mark Gilbert joins the pile-on:
http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_gilbert&sid=afqGNUNI2dR0
Mr. Clemons, please look at economist Mark Thoma's commentary on an LFT article re this bankruptcy (Thoma underscores profmarcus' point from above):
http://economistsview.typepad.com/economistsview/2005/10/financial_times_2.html
"A lot about this article surprises me. For instance, it seems to say that Delphi is not in serious trouble and bankruptcy is a being used as a way to restructure and to force labor to accept lower wages and reduced benefits. I don't see how creating a financial incentive for managers to lower wages and benefits necessarily improves efficiency instead of creating a distortion."
Delphi,GM and the UAW are nothing but liars and crooks that sleep together. Trust none of them on union representation or GM or Delphi on their products. Liars will lie about everything. Miller is going to pay alot of execs for nothing, these execs are worth nothing, they are the same liars and crooks who worked with Battenberg and Dawes. Why would anyone believe that Miller isn't the same? What makes Miller an expert on auto parts? Wasn't Battenberg supposely an expert also after all he was with GM. What happened to the SEC investigations, is there a pay off here?
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