Friday, November 21, 2008

Before the Bailout

There should be no Detroit bailout without an accompanying plan to transform GM and Ford into companies that are sustainable in the American business climate.  The manufacturing and assembly process is good, the quality is reasonable, the branding is there -- the main problem is salaries at the top and bottom of the scale.

Start with the top.  GM CEO Rick Wagoner made over $14 million in 2007 including benefits, stocks, and other goodies.  The top 5 executives at GM averaged $7.79 million.  At Ford, the top 5 did better, averaging $8.24 million, with top dog Alan Mulally bringing in over $21 million.  Chrysler is privately held by Cerberus, and salaries are not disclosed.  

If these companies want a bailout -- that is, want your money and my money and our children's money -- they need to subscribe to a completely different salary plan.  We have a federal structure for highly-compensated executives:  the President of the United States earns $400,000 per year and the Vice-President earns $221,100.  Senators and Representatives start at $169,300 and top out at $188,100 for leadership positions, except for the speaker of the House who earns $217,400.  The Chief Justice of the Supreme Court gets the same $217,400, and the associate justices make $208,100.  We also have a 15-grade scale for all other federal employees, depending on location in the US.  In Washington, DC, the most junior employee (Grade 1, Step 1) makes $20,607 and the most senior (Grade 15, Step 10) makes $149,000.  The pay rates are almost identical in Detroit.  Finally, the Senior Executive Service ranges from 139,600 to 191,300.

It seems to me that any company that wants to accept federal rescue money must start -- as an absolute prerequisite -- by accepting the federal pay scale for their non-union workers.  Details abound, but the basic idea is that the top person makes no more than $400,000 and everyone else works down from there.  Deferred compensation, including equity options like stocks, should also be limited to a federal equivalent.  This must be understood before any possibility of a bailout can be considered.

The same is true at the other end of the spectrum.  As it stands now, UAW workers earn an hourly wage of around $74 including benefits, while Toyota and Honda workers earn around $48 per hour.  Building cars that may or may not be as good as the competitors' with 50% higher labor rates is clearly not a sustainable business plan, and cannot be subsidized through a bailout that tries to get GM and Ford back to business as usual.  There is no more business as usual.  

A prerequisite to a federal bailout is that the GM and Ford workers accept a salary and benefit plan representative of the other US automakers.  What that means for the union is between the workers and their representatives.  What's clear is that a gold-plated deal with a company that goes into bankruptcy or even ceases to exist isn't worth the floor mats.

So in some ways it's good that there was no emergency bailout plan for Detroit before Congress adjourned.  Before considering any such plan, Congress needs to send the message: don't expect the taxpayers to clean up your mess.

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