The Politics of Executive Pay

General Motors is going to have some explaining to do. A lot of explaining. As the auto maker gears up for what could be a landmark round of bargaining with the United Auto Workers union—a set of talks that could turn the union’s deal of super-cheap health insurance, paid layoff clauses and other goodies on its head—GM almost doubled Chairman and CEO Rick Wagoner’s compensation package from $5.5 million last year to $10.2 million this year.

Or did they? Wagoner took a salary cut last year from $2.2 million to $1.3 million. Throw in another $146 million in other compensation and he made almost $1.5 million in cash last year. He also received another $620,000 in non-cash perks. The biggest chunk of his package, about $6.7 million, comes from stock awards and option awards that weren’t paid out last year and won’t be until at least 2008. And Wagoner can only make money on some of those items if he gets GM back on track and pushes the stock price up, in some cases way up.

In other words, he can only get most of that $10.2 million later, and even then he only gets paid for hitting certain targets. Here’s why. Of his $10.2 billion package, about $3.6 million of it is in stock awards and $3.1 million in option awards. The stock awards actually have a fair market value of $4.7 million right now. But GM hasn’t issued the stock awards yet. Wagoner only gets them if he hits certain performance targets. He won’t know how much value they have—if any—until at least 2008. They may have no value. In all likelihood, Wagoner will get a nice payout from the $4.7 million in stock awards, but he hasn’t gotten it yet.

Same with his option awards. Wagoner got $3.1 million in option awards. But the lion’s share of them are pegged at a stock price of $40 or higher (it closed at $31.56 on April 27) in some cases much higher. In other words, Wagoner has to get his stock way up to cash in on those. Of course, he has a few years to exercise most of them, so Wagoner has a crack at making some money. Wagoner will likely end up getting more than the $1.5 million in cash that his 2006 pay package has already given him, but anything above that will come later and only if he delivers results.

Union rank and file may look at the total value and say that GM just gave Wagoner and his team a big payout. Other executives got similar deals. Looking at the accounting value of their compensation packages, Vice Chairman Robert A. Lutz, GM’s car guy, got a deal valued at $8.4 million last year, close to triple the $3 million he made in ’05. Vice Chairman and CFO Frederick A. “Fritz” Henderson made $5.2 million in total compensation. GM didn’t disclose his salary for 2005 because he wasn’t one of the Proxy Six. He was just Chairman of GM-Europe. But given his new status, it’s a safe bet that he got a bigger package in 2006.

That’s why GM has a lot of explaining to do. Calculating how much Wagoner & Co. actually received is no easy trick. The details are buried in eight footnotes worth of legalese in the proxy statement. Someone will need to explain that to the UAW when GM is trying to wrest concessions from the union this summer.

For this year, GM is giving slight raises. GM will boost Wagoner’s salary about $370,000 to $1.65 million. Lutz and Henderson got raises of $153,000 for 2007 to $1.3 million. That seems fair. Wagoner cut GM’s losses from $10.6 billion to $2 billion and pushed the stock up 53% last year. Lutz’s new models are getting plaudits from car critics and faring pretty well in the market. Henderson has been involved in every major cleanup job or headline deal for GM, whether it was sorting through the company’s accounting mess, negotiating a settlement with the United Auto Workers over GM’s bankrupt former parts maker Delphi Corp. or kicking the tired at Chrysler Group.

But here’s why the union may still get upset. Even though Wagoner only actually got paid a fraction of the $10.2 million, the deferred incentive-based parts of his package could still pay him a big sum. And if he ends up making big money on it, it will be after the union signs off on a deal that may have significant concessions. Wall Street would probably say he deserves the payout for pushing up the stock and getting union concessions. But the UAW? They might think Wagoner & Co. cashed in after the union workers gave at the office.

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