With the recent revelation of Nissan, it has brought forth several questions across the economic landscape of “What happens now?”
As a response to this evolutionary question, Kavea compensation consultants will be delving into a three-part multi-series on compensation within a transaction framework. The series will explore:
- First, the most recent and public case of Nissan.
- Second, what occurs within compensation in a bankruptcy setting.
- Lastly, compensation within a merger/acquisition.
Nissan Bankruptcy Concerns
The Nissan bankruptcy concern refers to potential financial and organizational challenges faced by Nissan Motor Co. and the broader implications for the company, its stakeholders, and its strategic partners, such as Renault (in the Renault-Nissan-Mitsubishi Alliance). While Nissan has not officially filed for bankruptcy, there have been serious concerns about its financial health and the risks associated with a potential bankruptcy or significant restructuring.
These concerns stem from a combination of factors, including financial mismanagement, poor performance, leadership instability, and external market pressures. Below are some of the key issues contributing to these concerns:
Carlos Ghosn Scandal
A major catalyst for Nissan’s financial difficulties began with the arrest of former Chairman Carlos Ghosn in 2018. Ghosn was arrested in Japan on charges of financial misconduct, primarily stemming from the under-reporting of Ghosn’s compensation and misappropriating company funds for personal use.
The arrest led to substantial leadership changes and instability within Nissan’s corporate structure due to resignations and terminations. The ripple effect of the arrest raised external scrutiny on the company’s governance practices and internal financial controls.
Financial Struggles
Over the years following the scandal, Nissan faced significant financial losses. For example, the company reported a net loss of $6.1 billion in the fiscal year 2020 and subsequent negative earnings in later years. Challenges included:
- Dwindling sales, particularly in key markets such as the U.S. and China.
- Rising expenses related to research and development for electric vehicles (EVs) and autonomous driving technologies.
- Declining market share of traditional combustion engine vehicles.
Restructuring Plans and Cost-Cutting Measures
Nissan has implemented restructuring initiatives to address its financial challenges, including:
- Cutting excess jobs.
- Consolidating manufacturing operations.
- Focusing on increasing production in the EV market.
While these steps are part of a broader turnaround strategy, their effectiveness remains widely questioned.
External Market Pressures and Concerns
In addition to internal issues, Nissan faces external challenges, including:
- The COVID-19 pandemic, which disrupted global supply chains and reduced vehicle sales.
- Global semiconductor shortages affecting the auto industry and causing production delays.
- Intense competition in traditional and EV markets from automakers like Toyota, Volkswagen, Ford, General Motors, Tesla, and Rivian.
Job Cuts, CEO/Executive Compensation Cuts, and Economic Impact
In November, Nissan announced plans to cut approximately 9,000 jobs across its global operations, reducing headcount by nearly one-fifth. While these cuts will not take effect until January 1, 2025, it remains unclear where the reductions will be concentrated. Notable considerations include the Smyrna assembly plant in Tennessee, which employs roughly 8,000 U.S. auto workers.
Employee Job Cuts
Rising wages in the U.S. market have led to a 4-5% annual increase since 2020, with similar rates expected in 2025. The average salary in Tennessee is approximately $48,000, with benefits adding $18,500 per employee. If 8,000 jobs are eliminated at the Smyrna plant, annual savings could total $531,482,000 (excluding overtime). However, these savings will be offset in the short term by severance payments.
Executive Compensation
Executive pay reductions have also been significant. Nissan’s CEO has voluntarily halved his salary, with no timeline for reinstatement. Other executives are likely to face reduced compensation, including lower incentives and salaries.
Economic Impact and Recruiting
Potential job cuts could severely impact Tennessee’s local economy. The closure of the Smyrna plant may lead to an exodus of workers seeking employment elsewhere, further destabilizing the community. Moreover, key employee departures could expedite financial collapse, as high-value employees are often actively recruited by competitors.
To retain critical personnel during this uncertain period, Nissan may implement one-off agreements. Kavea will explore these retention packages further in part two of this series.
Conclusion
All of the above perspectives illustrate how Nissan’s potential bankruptcy is the culmination of multiple factors, including poor decision-making, economic challenges, and employee and investor sentiment. Unfortunately, employees are often the biggest “losers” in financial distress, followed closely by investors. Kavea will continue exploring these themes in the upcoming parts of this series.
