Smith Faculty Opinion Article - October 11, 2005

Hucksterism at Delphi
By Dr. Peter Morici, Professor of International Business

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.

The stock market is valuing down auto companies and their suppliers, because it understands that auto companies and suppliers assets, as a group, are worth more dismembered and rearranged than in their current amalgamations. The industry has too many auto companies, too many suppliers, too many executives, too many engineers, and too many autoworkers. In the reorganization the car and truck markets are imposing in painful steps, these folks as a group are worth a lot less than they are currently being paid.

Mr. Millers management compensation proposals are wholly irresponsible.