January 27, 2008
Executive Pay at Delphi
When it comes to executive compensation, scholars tend to fall into two camps. Some defend current levels of executive compensation as the product of a market. Simply put, highly skilled executives negotiate for very rich compensation packages because of the value they bring to the companies that they lead and because they would not agree to take on the risk and responsibility of such leadership if they were not appropriately compensated. Others (and I am in this camp) point out that executive compensation packages are not really the product of arms-length transactions since executives negotiate their salaries with boards of directors that consist largely of other executives who want to hire good people but also want executive compensation to be generous.
My reading of reports on the Delphi case suggests what would happen if executive pay were indeed the product of a negotiation involving an entity committed to protecting the interests of corporate constituencies other than management. Last week, in approving Delphi's reorganization plan, Bankruptcy Judge Robert D. Drain trimmed Delphi's proposed executive incentive pay from $87 million to $16.5 million, as reported here and here. Judge Drain questioned the compensation schemes because they were challenged by representatives from two unions that in turn represented Delphi workers who had accepted cuts in their own compensation packages in order to pave the way for reorganization. Under questioning from Judge Drain, Delphi's executive compensation consultant conceded that the approach he recommended was "novel," "rare," and "not the norm," according to Gretchen Morgenson's report in The New York Times.
I merely suggest that when parties reach an agreement for $87 million in compensation but then agree to $16.5 million in compensation under pressure from a judge, the original agreement is not the product of an arms-length negotiation. Would you be willing to do your job for less than 20% of your current salary? Perhaps Delphi has entered into some side agreement to provide additional compensation to executives in years to come, but if that is not the case, the Delphi reorganization plan seems like strong evidence of extraordinary elasticity in the market for executive services.
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It is worth noting that $16 million is hardly shabby pay for performance so bad that it ran the company into the ground so badly that it is in bankruptcy court, and that a compromise at this point probably opens the door to future years of hefty pay packages that can make up for a one year stumble.
Posted by: ohwilleke | Jan 28, 2008 4:11:02 PM
Just to be clear: the executives at issue here are not necessarily those responsible for Delphi's bankruptcy. Delphi's Chairman, Robert "Steve" Miller, specializes in helping companies emerge from bankruptcy, and I think he was hired after Delphi had filed for bankruptcy.
However, I did read today that Delphi will be able to compensate its executives for the hit they took from the bankruptcy court by giving them an 8% stake in the reorganized company. That stake will be shared by hundreds of executives, but its estimated value could be up to $400 million.
You can read the story here: http://crainsdetroit.com/apps/pbcs.dll/article?AID=/20080128/SUB/801280311/1033/-/-/delphi-executive-payout-cutback-a-victory-for-unions-many-say
Posted by: Jeremy Telman | Jan 28, 2008 5:37:09 PM