Lutz reacts to York – and the Dampier effect.

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.

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6 Comments

  1. I don’t get this international fascination with the NBA. Physical, grabby defense has destroyed the beauty of the game, and every team has its boatload of prima donna’s who wouldn’t know what teamwork was if it came up and bit them in the rear.

  2. Baseball fan greg?

    As for Bob – once you’re on the gravy train, why get off? Results? Who needs results? Just pump up the music and let off some smoke and fireworks in Detroit every once in a while and then settle back to selling more trucks and watching the cnn coverage of the war ( sorry, its a democracy now) in I-raq. Its good for hummer sales.

    Bob – read my lips. Its called La-la land and you’re in it.

  3. Greg, has your close proximity to Spree when the “family” comment was made put you off the game?

    For me? I just love the game. Great to play. You have a team to support you but your a large proportion of that team. Fantastic. And the NBA’s the best quality league that’s accessible here. I’d love to watch some Euroball if I could, but too hard to get here.

    That Bob’s a clown isn’t he? Funny guy.

  4. Yes, the whole Sam Cassell – Latrell Sprewell saga soured plenty of Minnesotans on the NBA. Sprewell in particular is an amazing study in stupidity. He turned down a 3 year, $21 million contract — and currently remains unemployed.

    As far as compensation goes, I really don’t think Wagoner and Lutz are doing what they’re doing primarily for money. What they’re worried about is the people under them, who will likely all get fired if the top brass goes. Those people need good compensation if they going to stay and take the risk that they’ll be fired later.

  5. Let me ask you something as a fellow sports fan.
    Bob Lutz makes how much a year? Let’s say it is $4.4 million.
    And a busted ass big man in the NBA makes $10 million. And he is 1 out of probably 5 Mavs making millions right? Just mavericks.

    Now Bob Lutz is in charge of turning around one of the nations largest automakers with product after years and years of mediocrity and poor business decisions. Should he be begrudged a salary half that of a guy that is paid to stand under a basket and jump around for 48 minutes a night? If he even plays half that.

    Come on. After the Detroit show I can see the Lutz light. I couldn’t in the new Impala (even though a much better Impala).

    If saab becomes profitable in 2006 it might be the time to sell! get rid of it while it’s hot. Saab does not make sense in the GM brand. With Ford, Volvo contributes back to the blue oval. Same with Mazda. GM is working in reverse.

    If I was a Saab fan I wouldnt’ mind being sold away from GM. It might make for more innovation.

  6. Comparisons to athletes’s salaries are irrelevant. It’s well known that many professional athletes are paid ridiculous sums of money for putting a ball in a net or (especially) smacking a ball with a bat. Hell, we can all complain that compared to athletes, we’re underpaid.

    More importantly, none of those aforementioned athletes are going to be asking their employees to take major salary/benefits cuts, as GM is going to have to do in the not so distant future. None of those employees are going to be sympathetic with Lutz’s “giving at the office” when they’re going to be trying to figure out how to make ends meet.

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