Defective Enterprises

Super-Sized Incentives: Behold and Beware

Another celebrated American executive is creating economic havoc, this time in the auto industry. What makes ostensibly smart CEOs act so dumb? We explore how over-the-top rewards play out.

By Sam Pizzigati

Smart, talented, ambitious people have a lot to offer. They also expect a lot. They expect our society’s best and biggest rewards, and the bigger the reward, the harder they’ll work to grab it. That’s fine — to a point. We certainly do want to see our “best and brightest” putting out, contributing as much as they can to endeavors that create wealth and advance the common good.

But if the rewards our society offers the smart and talented become too big, the smart can tend to start doing dumb things. The more outrageously large the reward, the more outrageous the dumb — and socially damaging — behavior.

Richard DauchSmart societies understand this dynamic and work, through tax laws and cultural norms, to keep rewards within reason. Here in the United States, we used to have many such laws and norms. We no longer do. We have swept away the restraints that once kept our society’s rewards relatively reasonable.

And now we’re paying the price. Our smart and talented today regularly do dumb things — and cause great damage.

Our latest exhibit A: the career of Richard E. Dauch, Corporate America’s latest superstar executive turned scourge of the late great American middle class.

Dauch currently serves as the CEO of American Axle and Manufacturing, an auto parts giant carved out of General Motors 14 years ago. Late this past May, after threatening to outsource “all of our business to other locations around the world,” Dauch forced 3,600 striking workers at his company’s five original American plants to accept a contract that cuts wages from $28 an hour down to as low as $14.35 and slices the company’s U.S. workforce by half.

One month later, in June, Dauch pocketed his reward: a $8.5 million bonus from the American Axle board of directors for his “leadership role” in “the structural transformation achieved under our new labor agreements.”

Dauch has now collected, over the last decade, over $258 million in compensation from American Axle — and, in the process, tossed thousands of U.S. worker families out of the middle class.

Auto workers, ironically, once symbolized that middle class, and for good reason. Precedent-setting union contracts at GM and other U.S. automakers after World War II helped give birth to the first mass middle class in world history.

And the executives who signed those contracts? They did well, too, but not too well. In 1950, for instance, General Motors president Charlie Wilson pulled in $586,100 in income, a bit over $5 million in current dollars. Today, someone at that $5 million level will usually clear, after taxes, around $4 million. Wilson cleared the equivalent of only $1.25 million. He paid nearly three-quarters of his income in taxes.

Mid-20th century America. in effect, frowned on excessive incomes at the nation’s economic summit. The result: America’s biggest companies, back then, manufactured cars, not mega millionaires.

A young Richard Dauch would start his auto industry career in this mid-20th century manufacturing culture — and thrive in it. The talented Dauch shot up the General Motors organizational charts. In 1965, GM named him a production foreman at the company’s Flint assembly plant. Three years later, he was supervising all the plant’s production. By 1976, Dauch was running all manufacturing for VW of America.

The rising young executive would go to similar heavy-duty responsibilities at Chrysler. By the mid-1980s, Dauch had established a reputation as one of the top managers in the entire American auto industry.

But that industry was now operating within an economy that had fundamentally changed. By the 1980s, the restraints on the size of the rewards the economy had to offer had begun eroding. The top tax on income over $400,000 — 91 percent in the Eisenhower years — would be 28 percent by 1986. Big money could now be made — and kept — and Corporate America’s smart, talented, and ambitious were pushing the envelope to make it.

Corporate America’s most ambitious operators were soon raking in more millions in a year than old-time executives like Charlie Wilson ever made in a career. And they were raking in these millions not by making and selling goods, but by making and selling companies. The action — and the rewards — had shifted. Dauch would shift, too.

In 1994. Dauch and another former General Motors executive rounded up a group of investors, bought up five mismanaged GM parts plans, and started up shop as a privately held company known as American Axle and Manufacturing.

Typically, in a buyout situation like this, the new owners follow some variation on what has come to be called the strip-and-flip script. They proceed to gin up profits at their new holding by any means necessary, then take their plaything public on the stock exchange and make a killing selling shares of their new company’s stock.

That by-any-means-necessary could include anything from squeezing worker wages, benefits, and pensions to slashing jobs and outlays for R & D.

At American Axle, Dauch would go a different route, at least at first. He would stay true to his mid-20th century auto industry roots. Dauch would pay standard auto industry union wages. He would invest in improving the company. And the company would prosper, helped along by the “guaranteed market for American Axle products” that General Motors so thoughtfully provided.

Dauch prospered, too, professionally and financially. In 1997, the National Association of Manufacturers named him America’s “manufacturer of the year.” By 2003, American Axle had become big enough the enter the Fortune 500, and Dauch was cashing in big-time on stock options. He would end up that year as the highest-paid executive in the entire auto industry, at $30.1 million.

Dauch was now making six times more, in inflation-adjusted dollars, than GM’s top exec made in 1950 — and paying taxes at less than one-third the rate. He would be in no hurry to see these good times end. To keep them going, he would start doing dumb things.

Dauch the smart and experienced manufacturing executive knew that enterprises only deliver quality when workers feel committed to their work. In American Axle’s early years, Dauch had worked to build that commitment. He didn’t just pay decent wages. He respected line workers enough, notes the Automotive News, to make the effort to remember the names of their kids. And he held his managers “to the same demanding standards as laborers.”

All that made Dauch “a local workingman’s folk hero” and generated “stellar quality and delivery records,” according to the executive in charge of GM’s purchasing and supply chain.

But by 2004 this commitment to building an effective enterprise was becoming increasingly difficult to maintain. American Axle’s competitors were taking the “low road” that Dauch had avoided. They were squeezing workers and quality to inflate their share prices — and keep ample executive rewards flowing.

So Dauch faced a choice. American Axle could fall in line and pander to Wall Street. Or Dauch could put his company’s share price — and his personal rewards — at risk by refusing to make the short-term cuts that would leave the company less efficient and effective in the long run.

Dauch chose the dark side. In 2004, American Axle began pressing the union to swallow lower pay rates for new workers. Two years later, Dauch tried to bully workers at his Buffalo, New York plant to accept wage concessions. They didn’t, and Dauch would go on to shut the plant down.

That set the stage for this year’s contract negotiations. American Axle came to the table with proposals for draconian wage and benefit cuts. Workers balked — and then walked out on strike in late February.

“We’re at war defending the middle class and its wage,” Bill Alford Jr., the president of United Auto Workers Local 235, told reporters. “If we lose here, then every other middle-class worker will be next.”

The American Axle workers did lose, not on every Dauch demand, but on enough to have Wall Street analysts gushing with investor happy-talk. American Axle, one analyst noted in late June, would likely reap over $300 million in savings from the worker concessions.

Dauch, meanwhile, is no longer spending much time talking with American Axle workers about their kids. Instead, the American Axle PR department is sending out news releases about his kids. Early in June, the company announced new career turns for the two Dauch boys at American Axle.

The an American Axle executive who had been setting up company plants overseas, is leaving his father’s side to run his own privately held company. The younger is becoming American Axle’s new president.

Rewards for the smart and talented, in a deeply unequal society, certainly do add up quick

Sam Pizzigati edits Too Much, the online weekly on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies.

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