Forgive me but I’m an NBA basketball nut. In the NBA, players can sign a contract up to six years in length. It used to be seven years, but the recent collective bargaining agreement cut it by one year. A frequent phenomenon in the NBA is known as ‘the contract year’, when a player’s stats will lift from consistently midrange or respectable numbers to stellar numbers – seemingly out of the blue.
The contract year is the year preceding the offseason when the player will negotiate a new contract for his services. His stats are beefed up in the contract year, making him more valuable to any clubs interested in his services. Typically, the player’s numbers will drop in the 18 months following the new contract – sometimes dropping much faster than they rose in the contract year.
I’ll call this the Dampier Effect, after Erick Dampier of the Dallas Mavericks. Damp went up from 8.2 points per game to 12.2 points per game in his contract year, accompanied by a big increase in rebounds as well (6.6 to 11.9 rpg). Why? Well, good big men are hard to find in the NBA. Averaging a double-double will certainly attract the talent scouts and in Damp’s case, they offered him a max contract that pays something in the order of $70 million over 7 seasons. So how’s Damp being going since?
You’d be smiling too at around $10 mil a year.
Well, the 12.2 ppg in his contract year dropped to 9.3 points the year after and is sitting at 5.6 points per game so far this season. His rebounging stats have also dipped from 11.9 rpg to just 7.6 rpg this year. It’s amazing what an incentive will do for your performance, huh? I’ve picked on Damp for this example but there’s heaps more of them in the NBA.
So what does this have to do with Saab? Well, very little actually. It’s more of a GM, Jerry York and Bob Lutz thing.
Jerry York, as Farago so eloquently stated, is the elephant in the corner of the room that GM can no longer dismiss. He represents an 8% ownership stake in GM, a stake that will likely rise at least to 10% in the very near term. This gives him some clout, and part of his prescription for GM’s return to health is a slashing of GM’s top executive salaries. Change should be implemented from the top-down. Right?
Not if your name’s Bob Lutz.
The Detroit News reports that Bob has replied to York’s suggestions, claiming they are totally wrong and citing his own loss of bonuses by saying "I gave at the office".
"I have to say I gave at the office," GM Vice Chairman and product chief Bob Lutz said, referring to what he estimates is a 60 percent drop in his salary after company losses forced him to forgo a bonus and rendered his stock options worthless.
Bob may have lost some pay, but this reads to me like he still took everything that was offered to him and not a penny less. In 2004, that means a salary of 1.55 million and bonuses that brought his overall compensation to a whopping $4.4 million. Under these circumstances, his "I gave at the office" is somewhat akin to a legendary NBA quote, where Latrell Sprewell knocked back several million a year, at age 35 or so, claiming "Hey, I’ve got a family to feed!".
Spree’s currently unemployed.
Lutz argues that dropping executive pay will lead to a talent drain at a time when GM needs all it’s resources close at hand. In what I see as another jaw dropper, he actualy says the following:
"Here’s where people get this wrong: They say, ‘Why are executives paid so much?’ You have to ask: Why are professional athletes paid so much?"
Well, the marketplace pays for the athletes. There ain’t that many owners going bust in the NBA, Bob. The jawdropper is below.
"The capability of successfully trying to turn around an unsuccessful automobile company is a very rare and highly sought after skill set. And you do the shareholder no good whatsoever by reducing compensation to the point where everybody leaves."
Here’s the thing: nobody’s turned GM around yet, Bob. This crew you have in place are the ones largely responsible for their current position. Their market value as executive staff is currently in deeper water than the Titanic. If these guys are truly the ones that can turn the company around, then they should be willing to take a contract loaded to reflect it.
*cue "Eye of the Tiger" music*
GM needs to get hungry again. Bob’s company is lobbying for pay cuts to the workforce and this latest outburst is going to be one of the biggest stumbling blocks to this actually happening. You can just imagine the UAW cutting and pasting this right now.
Toyota have set the pace for the last 5 or so years and the best GM has been able to do is slow the attrition rate. Check Toyota’s exec salaries. I don’t have the link right now, but they’re a fraction of their GM counterparts. It’s a team effort over there and it’s showing (a-la Detroit Pistons vs LA Lakers in 03/04 – the team vs the stars).
If GM is to truly pull itself out of this hole, then York’s prescription (minus the sell-off suggestion for both Saab and Hummer) is a pretty wise one. It’s basic business sense. Cut costs, develop product. But the responsibility has to be shared and like all good change, it has to come from the top. York’s boss, Kirk Kerkorian is willing to advocate a 50% cut in dividends, money taken from his own pocket (and holding as many shares as he does, it’s no small amount).
At least NBA teams get 1 or 2 outstanding years from a player prior to a new contract. Giving the top execs a fat contract up front removes the incentive all together.