GM has to go through bankruptcy procedings, but (a) a long drawn out bankruptcy will degrade from a Chapter 11 (reorganization) to a Chapter 7 (liquidation), and (b) no lender is likely to step up to provide DIP (financing during bankruptcy) lending. So instead this crisis requires (c) a pre-packaged bankrupticy which allows for a rapid in/out and (d) government financing when the necessary reorganization conditions are met. Pre-packaged bankruptices aren't typically used because all the parties involved won't agree without long, stressful negotiations on actions they individually don't want to do. Too bad, they have to and any other course just postpones the inevitable and wastes government/taxpayer funds. Congress needs to say--here is the plan; do it or forget it.
I haven't studied GM in depth and therefore don't have all the facts, but i've seen enough to know that this is about where it needs to go. No constituency of GM, executive, management, hourly, dealers, suppliers or board will like any of this. But the general public doesn't like any of what GM has been doing for a decade or so, and is strongly against any bailout with some sort of half-baked and unenforceable commitment. Here's approximately what it takes. Items 1-5 this week; next week items 6-10, concerning hourly and mileage standards and board composition.
#1. White collar, management, admin. staffs, i.e. everyone other than union employees. The number of employees in this category should be halved. One test I use--look at the number of these employees when a company was last at this sales volume measured in units: For GM this was probably 10-15 or many more years ago. A company always bloats over time and when it's output becomes smaller just can't figure out how to work with the levels of staff it previously used. In addition I always go deeper than this particular algorithm because it's likely it was bloated quite even at that time. To be clear, if a company currently sells and produces 1M units, a decline from a previous peak of 2M units, go back to when it last sold 1M units and let the staffing at that time be your benchmark. And these reductions must be real, not "attrition in the future." Summary point #1, cut this category of employees by 50%. For more see category F. Progressive Downsizing, accessed on the right of this page.
#2. Organization Chart. In parallel, reduce the levels on the organization chart (the number of levels that exist between the CEO and the first union/hourly level) by the same amount, that is 50%. Some will complain--each person will now have too many direct reports--however, the difficulties of "too many direct reports" is always overstated, while the chaos created by communication errors and bureaucratic bumbling created by too many layers in the organization chart is always understated. Summary to point #2--reduce layers by 50%.
#3. Compensation and debt conditions. The CEO can make $10M salary and all others are scaled proportionally down to the hourly worker wage. No bonuses are to be paid for the years 2009 and 2010 and also until the government debt is extinguished (paid back). Options may be awarded but the strike price will be established by the 30 day average around when the government debt is fully repaid (no individual gets the benefit of a strike price established at the current depressed levels, and this provides further incentive to repay the government loans). The government loans however carry a warrant with the strike price set for the day the government loan is awarded/placed; and the size of the warrant should reasonably allow for a 2x return on the debt. And: no golden parachutes--two times weekly salary per year of employment will suffice.
#4. Product line pruning. It is always appropriate for a company facing this degree of difficulty to do product line pruning. GM has been disinclined to do so for historic, nostaligic, can't-make-a-decision reasons. Too bad. The proliferation of brands eats GM alive--they have attempted to grow by diffusing their focus, a destructive contrarian approach.
#5. Perks. Sorry management folks, all company owned or supported destination resorts closed/sold, all free company car leases will expire, two private company planes--maximum--will be retained (it is efficient and effective to get management to meet with dealers, suppliers, customer conventions; so do keep two) and no others private charters, any other wastes of money for management comfort or pleasure that i've missed also get jettisoned.
Tom, You and I are in complete agreement. I am posting a link to your blog on my own. The structure you outline is exactly what was demanded from Chrysler in 1979, and that worked pretty well! Jeff
Posted by: Jeff Bell | December 15, 2008 at 11:38 AM