So when a federal judge ruled last week that he would green-light Delphi’s bankruptcy plan—but only if the board agreed to substantially cut back its “emergence” cash payouts for executives—it appeared to many that organized labor had scored a victory against management.
“That’s the way it’s being viewed around here,” says Robert Stevenson, benefits attorney at Stevenson Keppleman Associates, an Ann Arbor, Michigan, law firm that works with auto and auto parts companies. “It’s been contentious from the get-go, but it seems that the unions won this battle.”
Under Delphi’s original reorganization plan, several hundred executives were slated to receive a total of $87 million in cash bonuses once the company emerged from bankruptcy. But U.S. Bankruptcy Judge Robert D. Drain said January 22 that Delphi must reduce this amount by roughly 80 percent, to $16.5 million—a move that a Delphi spokesman says the company will officially make in the very near future.
Once Delphi makes these adjustments to the exec comp arrangements, Drain will confirm his approval of Delphi’s reorganization plan, marking the end of one of the largest bankruptcies in U.S. history.
A copy of the transcript from the January 22 confirmation hearing was not immediately available. But a source in attendance says the judge ultimately decided that Delphi was unable to “meet their burden and show that [the $87 million] was a fair and reasonable amount” to be paid out to executives upon emerging from bankruptcy. Drain did not specify how the cash should be put to use, however.
“You have seen a clear trend in recent years that the government is trying to find ways to cut back on executive compensation, especially in bankruptcy proceedings,” says John Utz, an attorney at benefits and compensation law firm Utz Miller & Kuhn in Overland Park, Kansas. “There is some real anger in various branches of government concerning excessive payouts.”
“A bankruptcy court can say or do whatever it wants,” says Gerald Meyers, a University of Michigan business professor and former chairman of American Motors. “But executive compensation issues become so much more visible when a union is involved, it can often become a condition of settlement.”
Unions representing Delphi workers, including the United Auto Workers and the IUE-CWA (the industrial division of the Communications Workers of America), have vigorously protested the exec comp packages the company proposed in its reorganization plans.
Of late, union leaders have argued that some of the payouts—including an $8.3 million emergence bonus that Delphi chairman Robert “Steve” Miller was slated to receive for guiding the company through bankruptcy—were excessive. That’s particularly true, they say, in light of the job cuts and wage reductions that many of Delphi’s employees have endured since the company filed for bankruptcy in October 2005.
Along with Miller’s $8.3 million payout, Rodney O’Neal, Delphi’s CEO, was to receive $5.3 million in cash post-bankruptcy. When these emergence bonuses were revealed in a filing earlier this month, they drew the ire of union officials, with IUE-CWA automotive conference board chairman Willie Thorpe calling the large payouts “ridiculous” in a statement.
Delphi management has contended that the incentives are necessary to help the company retain its key executives during the bankruptcy process. Indeed, many executives at the auto parts supplier agreed to greatly reduced salaries to illustrate their “commitment” to Delphi’s transformation, Miller said in a statement in late 2005.
For his part, Miller, who received a $3 million signing bonus when he joined Delphi in 2005, volunteered to reduce his salary to $1 in 2006 and also agreed to waive his 2006 annual bonuses. O’Neal also reduced his own compensation at the time, lowering his base salary by 20 percent.
In light of the judge’s decision, it remains to be seen how Miller and O’Neal will be rewarded when Delphi exits from Chapter 11 bankruptcy protection. And that emergence will be no small feat, given that the company still must secure $4.5 billion in exit financing in a shaky credit environment. Williams says that the two executives will have their emergence bonuses paid out from the cash pool of $16.5 million, adding that Delphi’s compensation committee will ultimately determine their new exit payments.
Drain’s decision only pertains to the emergence cash pool, Williams pointed out, adding that other major elements of the executive compensation plan will remain in place. In particular, several hundred executives and managers at Delphi will still be entitled to share an 8 percent equity stake in the reorganized company. That stake reportedly could be worth up to $400 million.