Fair Game
Royal Pay at Delphi, Reined in by a Judge
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By GRETCHEN MORGENSON
Published: January 27, 2008
MORE than two years ago, the Delphi Corporation, an automotive parts giant, filed for bankruptcy protection. Even as it asked workers, creditors and owners to accept big losses, Delphi requested a lush executive pay package that included $87 million in cash bonuses to be paid to top managers upon the company’s exit from bankruptcy. It was a wonderful example of unshared sacrifice that has become deplorably common in corporate America.
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Columnist Page: Gretchen Morgenson
Last week, Robert D. Drain, a federal bankruptcy judge in the Southern District of New York overseeing the Delphi bankruptcy, held a hearing to approve the company’s reorganization plan. Delphi hopes to exit bankruptcy this spring.
During the hearing, Judge Drain, who spent roughly an hour on the terms of the payouts and the compensation consultant who devised them, said he would approve Delphi’s bankruptcy exit plan only if the $87 million in incentive pay slated for management was reduced sharply, to $16.5 million. Delphi agreed to the cuts.
Judge Drain’s ruling is a service to every shareholder who feels ripped off by executives and the compensation consultants who serve them. His discussion of the packages brings a pragmatism to the topic of executive pay that is sorely lacking in corporate boardrooms. Let’s hope it is also noted by the compensation committees of public companies’ boards.
The pay packages came up in court because two unions representing Delphi workers in the bankruptcy objected to them. One, the United Automobile Workers, was represented by Peter D. DeChiara at Cohen, Weiss & Simon in New York. The other was the International Union of Electronic Workers-Communication Workers of America, represented by Tom Kennedy, lead partner at Kennedy, Jennik & Murray, also in New York.
“We believe it is the largest reduction in proposed management compensation ever imposed by a bankruptcy court,” Mr. Kennedy said last week. “The management compensation package was admittedly over market in many respects, and the judge concluded that Delphi did not support the proposed compensation plan with adequate demonstration that it was typical or appropriate.”
The consultant used by Delphi’s board to design the pay plan and defend it in court was Nick Bubnovich, of Watson Wyatt Worldwide. Mr. Bubnovich said that the $87 million reward was justified if managers were able to bring Delphi out of bankruptcy.
But in court, Judge Drain undressed Mr. Bubnovich’s position. He noted that the consultant could provide no explanation for why he tied the $87 million to the sole criterion of Delphi’s emergence from bankruptcy protection.
“The question raised by the unions, and frankly by me, is whether that analytical process bears any relation to reality,” the judge said in the hearing, according to a court transcript. “Mr. Bubnovich was candid in saying that the approach was a ‘novel one.’ He had not seen it before in his lengthy experience in Chapter 11 cases. To the contrary, he testified that as far as emergence cash bonus awards were concerned, such rewards were rare or not the norm in Chapter 11 cases and in far lower amounts.”
Through a spokesman, Mr. Bubnovich declined to comment.
IT was not that the executives operating Delphi in Chapter 11, led by the chief executive, Robert S. Miller, did not deserve an award, the judge said. Rather, it was the amount of the cash award and the matter of an “equivalence of sacrifice” that led Judge Drain to his conclusion.
“I should note, finally, that we are talking about actual dollars here in a debtor that is seeking to raise exit financing and can use every dollar that it has, another reason to be skeptical with regard to the asserted reasonableness of the $87 million cash emergence bonus,” the judge said.
Brian Foley, an expert in executive pay and the owner of an independent compensation consulting firm in White Plains, studied the Delphi plan in late 2005 and found it excessive. “It is truly refreshing to see a bankruptcy court judge carving one of these management exit packages back,” Mr. Foley said. “It doesn’t happen as often as it should.”
A Delphi spokesman said the company was pleased that the judge approved the emergence plan. He said the compensation committee of the board would decide how to allocate the $16.5 million.
Each company is different, of course. But the Delphi ruling shows that, in the rarefied air of the corporate boardroom, the amount of money thrown at hired hands is often ridiculous and baseless. In Judge Drain’s courtroom, where common sense appears to reign, the payouts shrank significantly. The judge’s ruling benefited almost all the stakeholders in Delphi.
If he retires from the bench, Judge Drain is not likely to be asked to lead a compensation committee of a company’s board. That’s a shame, because his judiciousness would serve shareholders well.
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