A Bankruptcy Bonus Bonanza

Executives at auto parts giant Delphi are pressing for over a half billion dollars in bonuses. Why do execs at Delphi merit bonuses and workers only pay cuts? A federal court will soon be asking that question.

January 16, 2006

A week from tomorrow, before a federal court in New York, the bankrupt auto parts maker Delphi will begin making the case for over half a billion dollars in bonuses for the company's top executives and managers.

Delphi, company officials claim, desperately needs bankruptcy court approval for this incredible bonus blitz to “motivate and reward high performance” and “retain executives during a period of volatility.”

This claim comes in a splashy, 35-page, four-color booklet Delphi had produced to sell the bankrupt company's proposed new “Key Employee Compensation” plan.

Key Employee Compensation Programs, or KECPs as they're known in corporate circles, have become a fixture in bankruptcy situations. Bankrupt companies file them regularly, whenever they want to get a bankruptcy court green light for lavishing extra pay on their top executives.

For people who don't spend much time hanging out in corporate boardrooms, the logic behind the typical “Key Employee Compensation” plan can be difficult to understand. How can top executives at a bankrupt company deserve big bonuses when everyone else in the company is getting asked to swallow pay cuts and pink slips?

That doesn't seem to make much sense — and, indeed, KECPs only make sense in the context of the massive shift in how bankruptcy business gets done in modern Corporate America.

A generation ago, going bankrupt used to be — for corporate executives — a shameful admission of failure. In today's business landscape, bankruptcy has become just another profit opportunity.

Executives at Delphi are simply seizing that opportunity. They're playing the bankruptcy game, by today's business rules, and they think they can win.

Here's how that game works. A reeling company goes into bankruptcy. Executives at that company use the bankruptcy law to shed their wage and pension obligations to the company's workers. With these obligations gone, the company suddenly starts looking attractive on Wall Street.

At that point, the company share price usually starts soaring — and that's when the real money starts flowing. Executives at the bankrupt company start cashing out, either by exercising their generous stock option bonuses or unloading the company to “vulture investors” and bailing out with a golden parachute severance package.

Robert “Steve” Miller, Delphi's CEO, knows this drill well. He learned it at the feet of the original master, as an underling to former Chrysler CEO Lee Iacocca in the early 1980s.

Twenty years later, as CEO at the troubled Bethlehem Steel, Miller ran the game himself, at one point axing health coverage for 95,000 Bethlehem Steel retirees to help pretty the company up for sale.

At Delphi, Miller has upped the game's stakes. The executive bonus plan he wants approved amounts to the biggest and most nonsensical “Key Employee Compensation” plan ever to come before a federal judge.

What's so illogical here? Just this: Steve Miller has been traipsing around the country, ever since he became Delphi CEO last summer, demanding deep pay cuts for Delphi workers because, Miller argues, they make more than their foreign counterparts.

But Delphi's executives make far more than their foreign executive counterparts than Delphi workers make compared to theirs — and, for these executives, Miller wants not pay cuts, but over half a billion in bonuses.

American corporate executives, as a group, take home considerably more than foreign executives, and the contrasts within the global auto industry stand in particularly sharp relief.

Americans first saw just how sharp eight years ago when Chrysler merged into the German carmaker Daimler-Benz. At the time, Daimler-Benz bestrode the world auto market as a much more successful company than Chrysler, with higher sales than Chrysler, higher revenues, and higher profits.

Yet in the year before that merger, the Chrysler CEO took home six times more pay than the Daimler-Benz CEO, and the top five Chrysler executives collectively took home five times more than the top ten executives at Daimler-Benz.

Overall, according to the latest figures from the Towers Perrin research group, German executives now take home 42 percent of U.S. executive pay, Japanese executives only 20 percent.

Delphi and Steve Miller never talk about executive pay differentials like these, of course. They base their case for a half-billion-plus in executive bonuses on the same faulty assumptions that have encouraged the explosion of executive pay in the United States over the last three decades.

The two most basic of these assumptions: first, that within the modern corporation only executives create value, and, second, that executives only create this value if they get awarded enough incentives to do so.

In Delphi proposed “Key Employee Compensation” plan, the only “key” employees identified happen to be executives. Nobody else at Delphi apparently matters to the company's future.

Outside of the 500 or so executives the Delphi plan earmarks for bonuses, none of the 24,000 workers the United Auto Workers union represents at Delphi will get to share in the bonus bonanza the company has proposed, no matter how well Delphi should do.

But doesn't Delphi, as a struggling bankrupt company, also need “high performance” from its workers? And if the company does need “high performance” from all its employees, not just those who sit in executive suites, how will rewarding executives with multi-millions while penalizing workers with pay cuts encourage that needed “high performance”?

In fact, Delphi's bonus plan isn't going to encourage “high performance” from anyone, even executives. The bonuses Delphi has proposed don't give executives an incentive to help the company survive and thrive. The bonuses, instead, give executives a incentive to cut and run.

Under the Delphi bonus plan, for instance, CEO Steve Miller's top four executive deputies will receive $3.1 million in annual salary, plus another $8.9 million in what Delphi calls “emergence cash bonus” should the company's assets get sold.

That gives these executives a powerful incentive to sell the company quickly — and no incentive at all to try to drive a hard bargain.

The Delphi plan also promises company executives additional bonuses in the form of stock shares and options. Delphi's chief operating officer, Rodney O'Neal, is slated to receive $1,150,000 in basic salary. If Delphi's stock price should triple, he'll take home an additional $17.5 million.

That gives Delphi execs like O'Neal an awesome incentive to make only those moves likely to fatten the company's quarterly bottom line, the short-term number that determines how Wall Street feels about a stock.

This same stock bonus gives Delphi executives a powerful reason to avoid making the investments that could help make Delphi a viable company down the road. Why, after all, invest in employee training or research and development — investments critical to Delphi's long-term prospects — when these investments will just mean lower quarterly profits, and a lower share price, in the here and now?

Attorneys for the UAW, in a legal brief they've filed in federal court, have dubbed Delphi's “Key Employee Compensation” plan “grossly excessive” and an “imprudent use” of the company's assets. The plan certainly merits both those appraisals, and even other voices in the business community — most notably JP Morgan Chase Bank — are crying foul.

The federal bankruptcy court will no doubt take all these objections into account before reaching a final decision on the Delphi bonus plan this summer. And the court also figures to pay attention to a little-known provision in the new federal bankruptcy law that went into effect October 17.

That provision, originally introduced by Massachusetts Senator Edward Kennedy, prohibits companies in bankruptcy from lavishing on their executives any retention or severance bonuses that amount to more than ten times the bonus average company employees received the year before.

Delphi filed for bankruptcy last year on October 8, just over a week before this new bonus limit went into effect. Interestingly, Delphi is arguing that the new law wouldn't torpedo its bonus plan, even if the law had gone into effect before Delphi filed for bankruptcy.

Will Delphi get away with that argument? Corporate America will be watching to see.

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