Delphi's planned executive compensation draws fire during confirmation hearing

By Rebecca Melvin

New York, Jan. 18 - Day two of Delphi Corp.'s plan confirmation hearings focused on the contentious issue of executive compensation, including base salaries, bonuses, emergence cash rewards, and equity set aside for management in the newly reorganized company, as well as the peer group chosen that formed the basis for many of those decisions.

Under the current proposed plan, Delphi's top two executives Robert S. "Steve" Miller and Rodney O'Neal would receive a combined cash reward of $13.6 million upon emergence from Chapter 11 bankruptcy, which represents a $5.6 million increase from an earlier withdrawn plan.

Chairman Miller would receive a cash reward of $8.3 million, compared to $5.3 million under the old plan; and O'Neal, chief executive officer, would receive $5.3 million, compared to $2.75 million under the old plan, counsel for the United Auto Workers union, Peter Dechiara of Cohen, Weiss & Simon, pointed out during the hearing at the U.S. Bankruptcy Court for the Southern District of New York.

It was announced shortly after Delphi's bankruptcy filing in 2005 that Miller, who was formerly chief executive as well as chairman, would draw a salary of only $1 a year, effective Jan. 1, 2006 until emergence.

Prior to bankruptcy, Miller was drawing a salary of $1.5 million.

Along with Miller, other top 10 executives took pay cuts. But witness Craig Naylor, Delphi's chairman of executive compensation committee, was cross examined to put on the record that the rest of Delphi's executive band, or 540 people, haven't had any reduction in salaries post-petition and have received regular bonuses.

Judge Robert D. Drain asked Naylor if O'Neal, who took a 20% pay cut, took that cut because the compensation committee realized his salary was over market compared to its peer group.

Base salary of the top 21 executive at Delphi is 12% over the 75% percentile of peer group.

Naylor said no, the pay cut was "purely an act of solidarity with the act of Miller's reduction of salary to $1."

During cross examination, Dechiara pointed out that total direct compensation of 540 Delphi executives was also above market pre-petition, and that according to a May 26, 2007 email from a Delphi board member the company may have set a too-low target for making short-term incentive bonuses.

Under the current proposed plan, equity set aside for the top 10 executives was also increased to 8% from 6.5% in the newly organized company. Of the 8%, 3% is available upon emergence and 5% at a later time.

Examining the peer group

Also argued during the hearing was that plan investors weren't provided with peer group survey information provided to the executive compensation committee.

The most recent peer group was reduced to 18 companies from 22.

The peer group selected, which included such companies as Pepsico, Dow Chemical and Best Buy, was controversial, drawing criticism for not being comparable manufacturing companies.

DeChiara pointed out that a compensation consultant for the creditors committee said the peer group should be revised so that it included solely manufacturing companies.

Witness Nick Bubnovick of Watson Wyatt testified that he didn't believe a solely manufacturing-based peer group was appropriate for Delphi.

His statement that he rejected some survey data as "flawed" caused Drain to ask, "I understand that it creates personnel issue, but was there anything wrong with the data as data, based on what benchmark companies were paying?"

Watson Wyatt acted as Delphi's consultant and helped the executive compensation committee design the key employee compensation plan.

Delphi, a Troy, Mich.-based automotive electronics manufacturer, filed for bankruptcy on Oct. 8, 2005. Its Chapter 11 case number is 05-44481.

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