I came across an article by Jeff Arends
in the Wall Street Journal
recently. The article outlines the differences in executive compensation between Berkshire Hathaway (BRK.A
) CEO Warren Buffett, and that of General Electric (GE
) CEO Jeff Immelt. As of the date of this writing and for some context, Berkshire is valued more than General Electric at $205 billion market cap against $195 billion for GE.
Arends writes that under Immelt, shareholder value creation has been a “disaster”. Since Immelt has been in charge of GE, for almost a decade now, shareholders have not made any money in the stock and have in fact lost tens of billions of dollars.
“The stock, which was $40 and change when Immelt took over, has collapsed to around $16. Even if you include dividends, investors are still down about 40%. In real post-inflation terms, stockholders have lost about half their money”, the article said.
Despite such a loss in value, Immelt has been paid about $90 million in salary, cash and pension benefits. This amount does not include the $5.8 million cash bonus he was “awarded” in 2009, or the bonus he skipped in 2008. Regardless Immelt still went home with $3.3 million in base salary during fiscal 2009 and total compensation of $9.9 million. For the last three years, Immelt has earned $33.5 million in compensation, or an average of $11.16 million per year.
“Since succeeding Jack Welch in 2001, Immelt has been paid a total of $28.2 million in salary and another $28.6 million in cash bonuses, for total payments of $56.8 million. That's over nine years, and in addition to all his stock- and option-grant entitlements.
It doesn't end there. Along with all his cash payments, Immelt also has accumulated a remarkable pension fund worth $32 million. That would be enough to provide, say, a 60-year-old retiree with a lifetime income of $192,000 a month”, an upset Arends wrote.
Immelt has been with GE for 27 years but that pension is ridiculously high and would not be available at almost any other company for a 27 year employee. Immelt also has personal use of company jets (that’s personal use, such as vacations, weekend getaways and so on), which cost GE $201,335 last year. GE also spent $36,000 and change leasing Immelt's car. That's three grand a month. It’s not known what car he drives (Rolls Royce?).
“The critical issue is that this is what the chief executive got because the stock did really badly. This was his consolation prize. It's a case of heads he wins, tails he gets ... $90 million and free trips to Hawaii. As of the end of last year, he had accumulated equity exposure, including stock options, performance stock units and the like, equivalent to about 6 million shares. Of these, just 836,000 shares have been bought with his own money while chief executive. (Some more may have been bought with his own money before he became chief.) What's more, Immelt's just been granted another 2 million options that will vest in stages during the next five years”.
Ironically it was under Immelt’s watch that the company had to seek out emergency capital, which arrived on harsh terms from Warren Buffett. Sadly for Immelt, the large Berkshire investment provides a damaging contrast for GE. “Buffett makes billions when his investors do well. But he also loses billions when they do badly, because he has nearly all his money tied up in stock. His cash salary comes to a mere $175,000 a year, or less than Jeff Immelt spent just on his personal use of GE's aircraft”.
GE is one of America’s greatest companies, but such reward for non-performance is not sustainable. Good corporations and leadership comes from the top, from the board through the CEO. I agree with Arends in that such large pay cannot possibly be justified for a company that is worth less now that it was ten years ago.