Hucksterism at Delphi - General Motors' biggest supplier

Analysis/Comment
Hucksterism at Delphi - General Motors' biggest supplier
By Professor Peter Morici, Robert H. Smith School of Business, University of Maryland
Oct 11, 2005, 14:32

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Professor Peter Morici is a recognized expert on international economic policy, the World Trade Organization, and international commercial agreements. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission.

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.

Delphi filed for bankruptcy protection last Saturday. The company is the largest car parts supplier in the US and is a former subsidiary of General Motors. This is what Delphi says about itself on its website: Delphi a world leader in mobile electronics and transportation components and systems technology. Multi-national Delphi conducts its business operations through various subsidiaries and has headquarters in Troy, Mich., USA, Paris, Tokyo and São Paulo, Brazil. Delphi's two business sectors – Dynamics, Propulsion, Thermal & Interior Sector and Electrical, Electronics, & Safety Sector - provide comprehensive product solutions to complex customer needs. Delphi has approximately 185,000 employees and operates 167 wholly owned manufacturing sites, 41 joint ventures, 53 customer centers and sales offices and 33 technical centers in 38 countries.

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. Miller’s management compensation proposals are wholly irresponsible.

Peter Morici
Professor
Robert H. Smith School of Business
University of Maryland
College Park, MD 20742-1815
703 549 4338
cell 703 618 4338

pmorici@rhsmith.umd.edu
http://www.smith.umd.edu/lbpp/faculty/morici.html
http://www.smith.umd.edu/faculty/pmorici/cv_pmorici.htm