Friday, April 22, 2011

It's About Time!

Wednesday's Wall Street Journal contained an article disclosing that finally, after nearly ten years as inept CEO of GE, Jeff Immelt's incentive compensation is being tied to GE's performance relative to the S&P500.

In this post from early 2009, I discussed Immelt's compensation,

"As the Journal reported recently,

"In addition to not receiving a bonus for 2008, Mr. Immelt also suggested -- and the board agreed -- that he forgo a special three-year, long-term incentive payout that would have totaled $11.7 million.

Mr. Immelt, 53 years old, earned $3.3 million in salary in 2008 and hasn't received a raise since 2005. He's also receiving a $2 million equity award.

That's a 61% decline from his compensation in 2007 of $13.81 million, which included salary, the $5.8 million bonus and equity award."

Boo hoo. A 61% decline from his 2007 compensation. If you read my prior posts concerning Immelt's total compensation as GE CEO to date, you will see that he could do with a few years of no pay, and still be overly-compensated for the immense damage he's caused his shareholders.

It's truly staggering to think, based on that second chart, that the GE board could give Immelt any sort of 'award,' not to mention the gross overpayment of $3.3MM...."
I've argued for years that CEOs such as Immelt should have incentive compensation tied to beating the S&P500 total return over several trailing years.
Thus, even the newly-announced $7.4MM of GE options being conditionally granted to Immelt are, again, favoring the CEO to the detriment of the firm's long-victimized shareholders.
For instance, the Wall Street Journal reported,
"Under the new terms, 50% of the options will vest only if the company pulls in cumulative industrial cash flow from operating activities of at least $55 billion between the start of 2011 and the end of 2014.
The other half will vest only if GE's total shareholder return is equal to or better than that of the S&P500 over the same period."
Hilariously, the Journal stated,
"Mr. Immelt, who saw GE through a rocky patch during the recession, received his first bonus in three years in 2010."
Rocky patch? Immelt's firm had to be bailed out by the federal govenment, for God's sake! Look at the nearby chart comparing GE and the S&P500 Index for the past five years. Even from 2007, GE has underperformed the index.
How can the firm's board justify giving this failing CEO anything over his base salary for such poor performance?
The new options contain overly-generous terms, especially for a CEO who has, as you can read in this post from 2006,
"So that makes a total of roughly $23MM in cash Immelt has now managed to loot from his employer since late 2001, when he began his reign as a failing CEO at GE. If the firm meets certain (fairly low-ball, as I recall from earlier articles) revenue, earnings and cash generation targets, and meets some stock price performance relative to the S&P, Immelt will receive as much as $18.6MM in 2007."
Why have a cash flow-oriented bonus condition? All Immelt needs do for that is make some acquisitions which boost this measure. And only equalling the S&P's return is not sufficient for a single company's CEO to be rewarded. The S&P is a broadly-diversified index, while GE is just one firm, leading to more risk for holding it rather than an index. At a minimum, Immelt's total return hurdle ought to be risk-adjusted for the variance of its total return. An easy way to do this is to set an average total return divided the standard deviation of that return over the time period equal to or better than that of the S&P for the same period.
Once again, we see that the GE board is behaving like a bunch of shareholder-looting cronies. Even when they pretend to make Immelt's incentive compensation conditional, it's on terms which are too forgiving. For such a large industrial firm, you'd think they could manage some theoretically-sound terms which reflect a basic understanding of finance.

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