What’s Dumb for GM is Dumb for America
And this is beyond dumb. According to Forbes, GM CEO Richard Wagoner was paid almost $2.5 million in bonuses last year. Let me tell you why that’s so stupid.
GM is a company in trouble. Despite three or four hot domestic vehicles (divided between seven domestic brands), GM’s future is bleak. Unimaginative designs are less than half their problem. The major portion of their problem is with overly-lavish employee benefits, amounting to more than $2,000 per vehicle made. Not sold – made. Meanwhile, to sell a car or truck or SUV, GM has to offer incentives worth an average of $3,100.
Do the math, and you’ll discover that GM suffers a $5,000-plus price disadvantage compared to its Japanese and Korean rivals. (NOTE: Thanks to the strong euro, European automakers enjoy a smaller advantage, if any.)
In the grand scheme of things, Wagoner’s bonus isn’t that big. If his efforts result in GM selling just 500 more vehicles than if, say, I were in charge, then he’s made good on his bonus.
The problem – the stupidity – lies in what Wagoner is telling his employees: “I’m out for me.”
GM just announced yet another round of factory closings and job cuts. To be exact, nine plants and 30,000 jobs. Wagoner has told the surviving workers that keeping his bonus – not his salary, but his bonus – is more important than keeping people employed. True, his bonus is only worth about 50 manufacturing jobs, but the point remains.
Let me tell you how things were done at another company.
My grandfather, Preston Green, was the sole owner of Southwest Steel Supply. My best guess is that SSS employed about 70 people. Fewer than 20 in the office, and the rest were Union guys – Teamsters, to be exact.
The white collar employees – my grandfather included – got paid a profit-sharing bonus in those years the company made a profit. When things were bad, management took a 10% pay cut, across the board, before a single employee was laid off. That rule applied to both office workers and the union guys.
The message he sent was: It’s management’s fault if we’re not making money, so we’ll take the hit before you guys will.
Now, I don’t know what Grandpa’s salary was, and I don’t know how much he paid his management team – all four of them. But I doubt their paycuts would save the job of a single Teamster. Nevertheless, the message was sent: We’re looking out for you.
Southwest Steel suffered just one strike while my grandfather owned the company, and that was during the Great Steel Shortage of the early ’70s, when damn near every steel union walked out. The unions weren’t stupid – there was so much money being made back then, they’d have been stupid not to have tried to grab a share of it.
But think about that for a moment. How many Teamster shops do you think went 35 years with only a single strike? How many union shops do you know of, who knew that management was watching their backs? Now consider that my grandfather hate-hate-hated the Teamsters and everything they stood for. But he also knew that if he wanted to count on them to make good product, they needed to be able to count on him to make good decisions.
I was privileged enough to spend a summer working alongside the Teamsters on the shop floor of the Madison, Ill. plant. And let me tell you, I was a bigger slacker than any of them were. And when they spoke of my grandfather, they always called him “the old man” in that way that signals respect.
What do you think GM’s union guys call Wagoner behind his back?
UPDATE: Related stuff from Robert Samuelson here.
I assume that when you said, “The white color employees,” you meant white collar?
The ‘old man’ sounds like a good person as well as a good businessman.
Leading by example is often the best way to promote good morale.
Mr. Wagoner on the otherhand sounds like a first class selfish little prick. We seem to have too many Wagoners in corporate boardrooms these days.
Oops! Typo from hell, eh? I’ll get that fixed.
This is just one example of a larger trend that just irritates the heck out of many otherwise pro-capitalist individuals such as me. Senior management continues to arrogate to itself higher and higher multiples of the salary of the average manufacturing employee, regardless of performance.
You will always hear people complain about unions and employee benefits, but these same people somehow lose their voices when some insider CEO with friends on the board gets his salary and bonuses jacked up to the point where he/she is making 400x what the people on the shop floor earn, even while the company is headed downhill.
Another classic example is the chairman of Walmart, who is taking home $22M per year even while the marketing plan has been a disaster, public relations is in the toilet, and the stock price has been declining steadily for the last few years.
There are hundreds of other examples. And just for the record, I’m not a union member, or even sympathizer. But I absolutely hate “crony capitalism”, which is unfortunately what normal capitalism perverts itself into the moment no one is watching.
I’m surprised that the chairman of Walmart makes only $22M a year, regardless of how big a failure (chuckle) it is.
Also, attracting leftist protesters and their MSM advocates is a sign of blazing success, not bad public relations. It comes with the territory.
Certainly some executives are way overpaid, but for the most part if you want the best to stay on through rough times, then you have to pay market rates for the talent.
Time and again I’ve seen companies protect the upper level management money while in times of crisis. In many cases they will let go entire departments that could be beneficial in turning the company around or that end up hurting them more (like cutting most of the maintenance staff who make sure the machines hum along).
This is analogous to pruning the roots of a drought-withered tree as opposed to the branch that’s infested with termites when winter is coming.
Steven; Your grandfather sounds like a good man to have worked for and the kind of Manager who’s just about disappeared. A little background. I spent 30 years in executive management in labor relations and HR in the auto and petrochemical industries, so this isn’t speculation, but experience (with some opinion thrown in). What galls me is the way executive compensation is determined. It supposedly is set by “the market”, but that’s largely a crock. It really is done by subjective surveys. Simplified version……You select several “peer” companies within the same industry, with the same size, structure, etc. as your company. Since there aren’t any exact matches, this is subjective. Then you find out how much people in similiar jobs in those companies make. Since the jobs are never exactly the same, you “weight” them, bringing in more subjectivity. Then you compare the average salary and the salary ranges of these similar jobs to what your range for that job is. Then you decide where you want your ranges to be relative to these other companies’ ranges. I never heard of a company that wanted their executives to be paid at the “average”, since everyone wants to believe that their companies and employees are better than average. So they pay at the 70th or 80th percentile. They ALL do. You can see where this leads……to a continuous upward spiral of compensation, regardless of performance. You do a survey and find that the midpoint of the base salary range for a, let’s say Marketing VP, is $300K, with a range from $260 to $340. If you want to pay at the 75th percentile you increase your range so that your midpoint is $320K. If over the next year or so, all the other companies in your little survey group do the same (and they will), the new average moves to $320K and the whole incestuous process starts over again. The same kind of thing also happens with bonus programs and other perks, so the whole compensation package just keeps ratcheting upwards, regardless of actual performance. Compensation professionals real task is to make sure this happens. If one of the survey companies has really bad times and doesn’t keep up, they can be dropped as a “non-comparable” and another company substituted. It’s all justified by the thought that “we have to attract the best people, so we have to pay the best”. Problem is, it’s not tied to performance. At the very top, there are very few people who’s experience, expertise and leadership abilities are truly transferable from company to company and industry to industry. Those few are worth the enormous amounts they’re paid, but many, many of them are not and could be replaced from their subordinates pretty easily and often to good effect. The only people who can break this is Boards of Directors, but that won’t happen until stockholders wake up and act. That’s not going to happen anytime soon.
Union/management issues aside, I find myself scratching my head regarding GM’s marketing strategies.
Example: I drove a Chevy Cavalier for the last 9 years. I beat the daylights out of that car on a daily 50 mile commute. It ran like a champ, and I never had any major mechanical difficulties with it. Several friends who also owned cavvies reported the same and were still drving them with well over 150K on the odometer.
So what does GM do? Discontinues a model that has a loyal following and consistent sales year in and year out.
When I asked the guys at my local dealership what the reasoning behind the decision was, they gave me some vague stuff about Chevy feeling that the brand had been around too long and they were concerned about the perception being that GM wasn’t coming up with anything new. Hence the (unnecessary) Cobalt that replaces the well-established Cavalier.
I guess the “If it ain’t broke, don’t fix it” credo doesn’t hold much water with the marketing geniuses at GM.
Back in my days of managing a rental car operation at DIA, I had the opportunity to experience some of GM’s problems first-hand. My particular company purchased a majority of our fleet from the guys. And let me tell you, to say their cars were low-quality, with few exceptions, would be an understatement. On an individual level, folks like Ginpundit may manage to have good luck. But we owned several hundred GM vehicles, and the maintenance required to run them, when compared to our Japanese models, was incredible. And surprisingly, the Cadillacs were some of the worst offenders. Ford and Chrysler at the time were not much better either. It always seemed like the Japanese brands were the ones that never gave us trouble. And until GM can match Toyota or Honda in reliability and quality, they will continue to have problems.
The big elephant in the corner is their quality is terrible. GM can cut pay, change management, close factories, but unless they improve their quality, it won’t do a bit of good.
I was lucky enough to work for GE duing the years a “very famous CEO” fired ~500K people and shuttered many, many facilities. Durning the time I worked at GE we felt that we had a huge target on our backs. It appeared that the rubric used was the cost of a newly graduated engineer. As soon as an experienced engineer was roughly twice the annual cost of a new graduate, the engineer was replaced. Oh, BTW, this CEO was praised and given very lavish bonuses for “cutting costs”. In the end, the people who made GE run were simply “costs”….
“Mike in Colorado” makes the statement “stockholders wake up and act” in respect to making BOD’s act to reign in this nonsense. Unfortunately the vast majority of stockholders are no longer individuals like you and me (I still hold GE stock). Individual investors have been replaced largely by fund managers and pension plans. These institutional investors are only interested in the short term results. Thus the management is only interested in short term results.
At GE we understood very clearly that any manger with 3 years in any given job was a failure. This meant that to be a successful manager you had to change jobs constantly and if your short term results didn’t match expectations the easy way to meet goals was to fire a bunch of people. Firing people was always seen as the magic bullet for stepping up the corporate ladder. And, since people were only “costs” this was easy and expected.
The end result of many years of short term focus is a company that is underperforming (with respect to the DOW) most likely do to sending the best, brighest, and most experienced engineers to the competition (many of whom are based in other countries)….
Great going guys. I hope you’re really proud of yourselves.
gutless, visionless & brainless management
AND
unionized labor goons
GM is so screwed
It is so easy to pick one bad guy and pin all the blame on him, but there are plenty of problems at GM that have been around since well before he arrived. Labor unions had their place and time, but now are the primary reason that it is cost-prohibitive to manufacture many products in the U.S. and remain competitive on a global scale. If you ever get a chance to spend some time in a Toyota plant and then spend some time in any American automotive plant with UAW representation, it will become abundantly clear why the American automotive industry is in big trouble and will continue to be in big trouble until a major change in work culture takes place.