BreakingviewsLong-suffering GE shareholders flex muscle on pay

Robert Cyran
3 minute read

A General Electric sign is seen at the second China International Import Expo in Shanghai, November 6, 2019. REUTERS/Aly Song

Executive pay often resembles a ratchet, only going in one direction: up. Shareholders of General Electric (GE.N) on Tuesday rebelled. Nearly 58% of them voted against top executives’ pay for 2020, including $73 million for boss Larry Culp. It’s a rare rebuke, richly deserved.

A long-term investor in GE may see cause for hope. The shares are down a third over 10 years, against a roughly 200% gain in the S&P 500 Index. In the past year, though, they've beaten the benchmark. Culp has slimmed down the conglomerate since assuming the chief executive role in 2018. He sold a biopharma unit for $21 billion, divested lightbulbs, reduced the firm’s stake in oil-services company Baker Hughes (BKR.N), and agreed to merge GE’s aircraft-leasing business with specialist AerCap (AER.N).

But Culp has not yet put GE's decades of trouble behind it. And investors took umbrage at last August's repricing of some of the "inducement" granted to him when he started. The original grant would have paid him well over $200 million if GE’s stock price hit $31. The new package has the same potential payout, but with a new upper trigger of $16.68 per share, barely more than half the old. Though any of those big stock awards are several years away, that fattened up his reported pay for last year, giving a hollow ring to the pandemic-year gesture of giving up his bonus and most of his salary.

Rewarding executives for raising a company's stock price is supposed to put them on the same side as shareholders. Changing the hurdle downward after a company’s stock hits a bad patch undoes that alignment. Some stock-market hits aren't a CEO's fault. Even so, while investors have to grit their teeth and bear losses, the already handsomely paid executive simply gets a reset.

Say-on-pay votes, as they are known, are advisory, not binding. But majority votes against a board's judgment are rare and can't be ignored. AT&T (T.N) also got the thumbs-down on Friday, and shareholders have already balked at compensation at a few other public companies during the current annual-meeting season. If they keep this up, perhaps boards of directors will at least use their ratchets more sparingly.

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CONTEXT NEWS

- According to preliminary results released on May 4, 57.7% of shareholders rejected General Electric’s pay packages for named executives, including Chief Executive Larry Culp. The vote is advisory.

- In 2020, Culp forfeited his bonus and most of his $2.5 million salary. However, his total compensation was $73.2 million, according to the company’s proxy statement.

- In August, GE disclosed it had extended Culp’s contract by two years to 2024 and replaced his sign-on incentive package with a new one calculated using a lower share price. Culp took over at GE in October 2018 and was given an “inducement” that would pay up to $232 million if the share price hit $31, compared with a reference level of $12.40. The new package would pay out the same potential amount, but with a new upper threshold of $16.68 per share.

- In order to receive the award Culp must remain in service until his contract ends, which can include him moving from chief executive to executive chairman during the fourth year and becoming a director or consultant in the fifth.

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