Question

Delphi Corporation The United Auto Workers filed an objection to Delphi Corporation’s plan to offer its top executives cash and bonuses potentially valued at more than $500 million, arguing the proposal would impede the ability of the union to reach an agreement with the auto-parts supplier on wage and job cuts for hourly workers. The UAW, along with other Delphi unions like the United Steel Workers, says the compensation plan “is decidedly the wrong message to Delphi’s workers,” at a time union members are being asked to accept pay cuts from an average of $26 an hour to about $12.50 an hour. “It is imperative that the debtor’s key personnel are appropriately incentivized to maximize the financial performance of the debtor’s operations,” says Delphi in its motion supporting the compensation plan. “The alignment of an incentive program that tracks the debtor’s goals is crucial to the debtor’s ability to navigate through this process and emerge successfully . Under its proposed employee-compensation plan, Delphi would allocate $21.8 million for cash bonuses to executives during the first six months of bankruptcy, and then an additional $87.9 million for 486 U.S. executives who would receive 30 to 250 percent of their salaries once Delphi emerges from bankruptcy. The most potentially lucrative element of the compensation plan is a proposal to give Delphi’s top 600 worldwide executives 10 percent of the equity in the reorganized company, a stake the unions estimate could be worth $400 million.

QUESTIONS: 1 .How does equity theory explain the UAW’s reactions to the proposed compensation plan?

2. How does equity theory explain Delphi leadership’s defense of the compensation proposal?

3. What type of competitive strategy does the proposed compensation plan best fit? How would the proposal affect pay structure within Delphi?

4. Based on concepts from agency theory and expectancy theory, how might the compensation proposal motivate executives?

5. What procedural justice issues have been violated by Delphi’s proposal?

6. What would you recommend for a compensation plan at Delphi?

Answer 1

According to equity theory people are driven by the value of fairness.

People estimate the equity of their pay by equating their outcome to input ratio with some other person's ratio. This comparison person is concerned to as one's “referent other.”

People feel equity when the output result to input ratios of the individual person and his or her referent other are comprehended as being equal. A feeling of unfairness happens when the two ratios are comprehended as being unequal.

This happened in the current case, when UAW’s is seeing the act of giving executives a hefty amount while asking employees to accept wage cuts is unfair.