GM’s Employee Buyout Offer

After the markets closed yesterday, General Motors announced that approximately 35,000 hourly workers have accepted buyouts to leave the company. The huge number was a surprise to both management and the union, indicating that the parties did an excellent job “pricing” the incentive earlier this year.

Three-way negotiations between GM, Delphi and the United Auto Workers last spring were contentious and intense, with each party threatening mutually assured destruction. Already in bankruptcy, Delphi said they might ask a judge to void the UAW contracts. In turn, the UAW threatened a strike against Delphi, which could effectively shut down General Motors by denying them the Delphi parts necessary to make Chevys and Buicks.

Behind all the rhetoric and posturing was what economists would identify as a shared interest: to “price” the buyout incentive high enough to shrink GM and Delphi without breaking the bank in the process. Somehow the buyout incentive would need to be attractive enough to get factory workers to give up a good-paying job, and the public noise about a GM bankruptcy would have to be loud enough to add some risk to the option of sticking with that job.

Industry watchers have suggested a variety of theories to explain the steady decline of GM. Some blame the labor contracts conceived in the 50’s and 60’s, while others blame a recent over-reliance on gas-guzzling SUV’s. In my view, undesirable cars and trucks are the reason behind GM’s dwindling market share; a steady stream of hit products could have sustained GM as a profitable company in spite of its large retiree health and pension costs.

Regardless, GM, Delphi and the UAW can share credit for a significant success today, collaborating in the design of an incentive that worked exactly as planned.