Delphi's Bankruptcy Plan Is Gold for Management
Bloomberg

By Graef Crystal (Commentary)

Nov. 17, 2005

Call it tacky, unseemly or crass.

Your choice. Mine is all three.

To Delphi Corp., it's acceptable: To survive bankruptcy and emerge as a viable company, persuade a bankruptcy judge to approve a lavish set of self-enriching compensation plans for a corps of executives, while simultaneously doing everything to slash worker pay and benefits.

Reminds me of attorney Joseph Welch's accusation aimed at Senator Joseph McCarthy during hearings in the 1950s, in which McCarthy attacked the U.S. Army for being filled with communists: “Have you no decency sir, at long last!”

It's not that Delphi shouldn't keep good managers and bring in others from outside the company: It's that what is being recommended is way too much.

Delphi, aided by compensation consultant Watson Wyatt Worldwide and by the law firm of Skadden, Arps, Slate, Meagher & Flom LLP, is trying to assure itself that the company's top management will be doing just fine even if its workers take it on the chin and in the gut. Those more than 33,000 workers face wage cuts to $9.50 an hour from $27.50, as well as reduced pensions and other benefits.

Troy, Michigan-based Delphi is peddling the argument that to survive bankruptcy, its top management team has to be paid handsomely, or else all will shortly depart for greener pastures.

That argument raises three questions:

-- Why keep in place a top management team that has already demonstrated its inability to, well, manage?

-- For those with industry-specific experience, just where are those greener pastures? Hello; the entire U.S. automotive industry is in deep trouble.

-- For those with skills that can be useful in other industries, why can't Delphi easily replace them, if necessary?

The talent pool here is huge.

The executive compensation proposal has four parts, and there's quite a bit wrong with three of them. First, we have a new annual incentive plan. The performance metric upon which bonuses will be predicated is earnings before interest, taxes, depreciation, amortization and restructuring costs (EBITDAR for short). EBITDAR goals will be set for six-month periods, with participating executives afforded the opportunity to earn bonuses twice a year.

What's wrong?

-- Delphi creditors may not be overjoyed to find that the top management's pay will be insulated from the burden of interest costs. Under current arrangements, bonuses are predicated on net earnings, a metric that implicitly penalizes management for taking on debt that doesn't pay for itself in the form of increased profits.

-- And eliminating “restructuring costs” could offer considerable temptation to move other costs into that category and therefore increase bonuses.

-- In its pleading, Skadden Arps claims that shortening the incentive window to six-months will “increase the incentive to meet the targeted goals.” If that's the case, why stop at six months? How about once a week? A six-month bonus program allows a participant to earn a bonus at least for half a year's good results even though the full-year results are abysmal.

Part two of the proposed new executive pay arrangements features a new “Emergence Bonus Plan.” Under it, participating executives can earn cash bonuses ranging from 30 percent to 250 percent of their salary “upon confirmation of the plan of reorganization or a sale of all or substantially all of the company's assets.” The higher you are in the food chain, the higher is the cash bonus opportunity.

What's wrong?

-- Skadden Arps makes the following statement in its pleading: “Noticeably absent is any form of retention plan.” It also states: “The Key Employee Compensation Program does not include a retention or stay component which differentiates it from other incentive programs.”

Really! You could have fooled me.

If you can get a cash bonus of 250 percent of your salary for staying with the company, how can that not be characterized as a “stay” or “retention” bonus? Ah, lawyers. What they can do with words is an amazing thing to behold.

Under the third part of the proposed new arrangements, we have tons of company stock, rather than cash. Assuming Delphi emerges from bankruptcy, it is proposed that equity incentives equal to 10 percent of the new common shares outstanding be available for distribution to 600 executives. A third of those awards would be in free shares with the rest in stock option grants.

Again, what's wrong?

-- To justify carving aside such a lavish amount of equity, Watson Wyatt has presented some statistics that, to my way of thinking, have, at best, dubious utility. Among other things, Watson Wyatt says that other companies coming out of bankruptcy typically reserve about 11 percent of equity in the first year after their emergence. It also says that the median company among those comprising the Standard & Poor's 500 Index reserves 13 percent of its equity over a “three to five year period.”

So which is it: Three years? Five years? Or four years? It makes a big difference. Besides, it's hard to find in the proposals any ironclad guarantee that all that equity won't be airdropped over Delphi's headquarters on a single day --like the day after the company emerges from bankruptcy. If that happens, you can be sure that the company's management will shortly be back to its compensation committee, with tin cups rattling away.

-- In its presentation, Watson Wyatt assumes that Delphi will emerge from bankruptcy with a market cap of approximately $4 billion. If that assumption holds, and if Delphi's stock goes on to double, then 600 participating executives will earn $400 million from their equity grants.

For a group that large, that's a pretty impressive amount.

Remember, too, granting free shares and option shares equal to 10 percent of the shares outstanding says nothing about what percentage Delphi's executives will haul away from any increase in the company's future stock price.

I have tested the proposed handout all the way to a future market price that is 20 times the initial price coming out of bankruptcy and still can't get to a point where executives are taking out as little as 10 percent of the increased stock price.

Think also that if the future stock price remains the same as the initial price or falls, the management takeout, compared with the increase in market price, becomes infinite. Nice deal for executives. Not so nice for shareholders.

To get a better handle on this 10 percent proposal, I selected all 30 U.S. publicly-traded companies with total employee headcounts in the range of 125,200 to 245,200.

(Delphi's current headcount is 185,200, right in the middle of this range.) For the year 2004, the median company granted stock options that, in number, were equal to just 1.1 percent of the shares outstanding. To be sure, some of those companies would also have made some free share grants, as well.

So perhaps the 1.1 percent might rise to, say, 1.5 percent, were those free share grants to be counted. Still, on the basis of this analysis (which relies on Aon Consulting's eComp database), I can't get to 10 percent, except over, say, six to seven years. Remember here that Delphi's headquarters are in the Detroit metropolitan area, not in San Jose. Detroit is not now, nor has it ever been, stock option heaven.

And finally, there is a severance plan -- though of relatively modest dimension -- for those who are discharged for other than cause or who resign for so-called “good reason.”

So there you have it. All bases covered. No deaths. No serious injuries. At best, a few ankle sprains requiring a bit of ice.

As for Delphi workers: Put those sea-sickness patches behind your ears. There's rough weather ahead.