Brian O'Connor

Chrysler sale pays off big for Schrempp

So, what would you expect to get if you were Juergen Schrempp, the Teutonic mastermind behind the doomed "merger of equals" that spawned DaimlerChrysler AG?

A. A lifetime membership in the hall of business infamy.

B. Your career in disgrace, personal fortune in tatters.

C. A mob of torch-bearing money-losing shareholders dragging you off to be eaten by wolves in the Black Forest.

D. $134 million in stock profits.

Anyone paying attention to the gilded goof-ups warming the thrones of the executive suite know the sad but predictable answer is "D."

Schrempp, the architect of the disastrous DaimlerChrysler alliance, has stock options worth up to $134 million, thanks to the run-up sparked by Chrysler's sale to private investors.

A little history: After consummating in October 1998 the largest industrial merger in history -- a deal that valued Chrysler at $36 billion -- the result was not a Mercedes-Chrysler global auto power couple, but a fizzling and dysfunctional manufacturing marriage.

By 2003, the stock was down more than 50 percent from its first euphoric day of trading. DaimlerChrysler is estimated to have lost $12.6 billion in value during nine years, not to mention lost business to suppliers, shuttered factories and some 40,000 lost jobs at Chrysler, including the most recent round of 13,000 cuts.

Now a private equity fund is paying $29 billion less for Chrysler than Daimler forked over. When you get to the bottom line, the Germans are taking an actual loss of $650 million, just to escape this K-car crack-up.

Schrempp left DaimlerChrysler in 2005 in what surely was a humiliating exit, but one that let him retain attractive stock options.

Stock options are -- theoretically -- based on the notion that an executive doesn't make money unless the shareholders do, too. But options often are manipulated, awarded with such favorable terms that no matter how poorly the company does, the executives are richly rewarded.

Now that someone else has cleaned up his mess, DaimlerChrysler stock is expected to go as high as 100 euros per share, producing as much as $134 million for Schrempp, according to the German newspaper Handelsblatt.

A check that big is more than enough to wipe the taste of failure out of your mouth. And wash it down with a fine Riesling, too.

"It's the whole, 'Heads I win, tails you lose' mentality that we see all too often," says Daniel Pedrotty, director of the investment office of the AFL-CIO.

Board members and compensation consultants worry more about taking care of each other than looking out for shareholders, he says. Members serve on each other's boards and do business with each other, while it's often the CEO who hires consultants that recommend his pay package.

The problem is that these inbred corporate boards are massively misaligning the incentives executives get with the goal of keeping the company healthy, growing and profitable.

"They don't get that they're awarding pay for failure," Pedrotty says. "Pay for pulse is what we call it."

In Schrempp's case, he's not getting money he helped earn -- he's cashing in because other executives resigned themselves to eating the loss he created.

Instead of being an incentive and reward, stock options turn executives into speculators in their own companies. That's why we get the current options backdating scandal, where hundreds of companies gave executives options that could only make money.

Then there is the ongoing situation where executives focus not on the long-term health of the company and best interests of the workers, customers and shareholders, but on the quarterly profits Wall Street traders demand to keep the stock price -- and CEO stock options -- up.

Reforms may be on the way. Bills are headed through Congress, and even President Bush warned corporate boards in January to "step up to their responsibilities" and align executive pay with performance.

In the meantime, too many corporate boards will continue to ignore "pay for performance" and instead choose "pay for pulse."

And I bet Schrempp's will be beating a whole lot faster when he cashes in those options.

You can reach Money & Life Editor Brian O'Connor at (313) 222-2145 or boconnor@detnews.com.