As many General Electric Company ( NYSE: GE ) shareholders are aware, they have not profited in the past three years. Once the most valuable company in the world, General Electric looks like a shadow of itself. However, what is unusual is that EPS growth has been positive, suggesting that the share price has diverged from fundamentals.
Senior executives’ compensation is often structured to reward the stock performance, yet this is a double-edged sword. In some companies, this leads to gentrification — aggressive policies to push the price higher without solving the underlying problems that got it low.
Voting on resolutions such as executive remuneration and other matters is a way to influence management. After laying off 20,000 employees in 2020, it is not a surprise that executive compensation became a hot topic in the last months.
We discuss below why we think shareholders should be second-guessing the CEO compensation at the moment.
Comparing General Electric Company's CEO Compensation With the industry
General Electric Company has a market capitalization of US$114b, and total annual CEO compensation was reported as US$73m for the year to December 2020. That's a notable increase of 198% last year. We think total compensation is more important, but our data shows that the CEO salary is lower, at US$653k. Yet, this number is skewed because Culp gave up a majority of his salary in light of the pandemic. Otherwise, it would have been US$2.5m, with a US $5.6m bonus.
In comparison to the industry with market capitalizations over US$8.0b, the reported median total CEO compensation was US$19m. It suggests that Larry Culp is paid more than the median for the industry. Moreover, Larry Culp also holds US$196m worth of General Electric stock directly under their name, which means he has a significant personal stake in the company. It is important to note that Culp cannot sell those shares until at least 2024 and must remain at the company to get them.
In the industry, salary represented approximately 8% of total compensation out of all the companies we analyzed, while other remuneration made up 92% of the pie. General Electric has chosen to compensate its CEO with less of a traditional salary and more non-salary rewards over the last year. If total compensation is slanted towards non-salary benefits, it indicates that CEO pay reflects the company’s performance.
NYSE: GE CEO Compensation July 8th, 2021
A Look at General Electric Company's Growth Numbers
Over the past three years, General Electric Company has seen its earnings per share (EPS) grow by 88% per year. It saw its revenue drop 16% over the last year. With 2020 being an outlier year by every possible measure, these numbers are obviously skewed. The first one by the significant sale of assets and the second by the drop in the global economic activity.
Overall this is a positive result for shareholders. GE is simplifying its business, rebranding as a focused industrial player instead of relying on cheap debt in the low-interest-rate environment.
Historical performance can sometimes be a good indicator of what's coming up next. Still, if you want to peer into the company's future, you might be interested in this free visualization of analyst forecasts.
Has General Electric Company Been A Good Investment?
Given the total shareholder loss of 1.4% over three years, many shareholders in General Electric Company are somewhat dissatisfied. So shareholders would probably want the company to be less generous with CEO compensation.
Yet, Culp positively impacted the company, slashing the costs, unloading the troubling assets, and focusing on the positive cash flow.
CEO Needs the Stock Price High
General Electric has been sailing through the rough seas for the better part of the last 20 years. Unable to find a worthy successor for the legendary Jack Welch, they turned to external talent for the first time. Culp leveraged this position, securing US$2.5m in annual salary, a target bonus of US$3.75m, a yearly stock grant of US$15m, and a special bonus of 4.65 million shares at the end of the contract - if the stock price manages to stay above $10 for 30 straight days (a threshold he has met). With all the incentives, some analysts speculate that an original 4-year tenure could bring the total compensation over US$230m . In addition, a contract amendment in 2020 prolonged this to 2 more years and slashed the compensation benchmarks even further ( from the stock price of $30 to $16.68 )
The fact that shareholders are sitting on a loss on the value of their shares in the past few years is undoubtedly troubling. The stock's movement is disjointed with the company's earnings growth, which ideally should move in the same direction.
Investors understand these concerns. In the last annual meeting in May, 58% voted against the executive pay program in a non-binding referendum. However, this doesn’t influence the CEO’s compensation contract, and Larry Culp remains one of the best-paid senior executives in the U.S.
Switching gears from General Electric, if you're hunting for a pristine balance sheet and premium returns, this free list of high return, low debt companies is a great place to look.
Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.