GE Bonus Plan Could Encourage Deal-Making

New incentive pay plan gives Immelt motive to tap NBC cash for deals.

General Electric Co.’s new incentive pay plan gives Chief Executive Officer Jeffrey Immelt motive to tap $16.7 billion from last month’s sale of the rest of NBC to fund industrial acquisitions.

The three-year program will pay Immelt in part for increasing the share of GE’s profit from manufacturing businesses, the company said last week in a Securities and Exchange Commission filing. It replaces an arrangement from 2010 to 2012 that rewarded his success in shrinking the finance unit.

Immelt, who earned $12.1 million under the previous pact, must also boost earnings per share while amassing cash and increasing return on capital to receive the maximum payout, which the company didn’t disclose. GE will probably look for more deals like its $4.3 billion purchase of Avio SpA, which bolsters its jet-engine business, Daniel Holland, an analyst with Chicago-based Morningstar Inc., said in a phone interview.

“There’s a good opportunity for the company to grow this year on the acquisition front,” Holland said. “If that’s how I’m going to get paid as the leader of the company and my bonus is dependent on growing a certain side of the business, and I have this cash available to me now, I’m going to do everything within my power to make that happen.”

Seth Martin, a spokesman for Fairfield, Connecticut-based GE, declined to comment on the company’s compensation practices.

Earnings at divisions making products from locomotives to medical scanners will account for about 65 percent of GE’s operating earnings by 2015, the final year in which Immelt’s performance will be measured under the new plan, the company predicted at a meeting with investors and analysts in December. Those earnings made up 55 percent of profit, on the same basis, in 2012.

At the same time, sales growth at the company’s industrial units is projected to slow this year, excluding any benefit from acquisitions. So-called organic revenue growth will fall to as low as 2 percent in 2013, compared with 8 percent last year, executives said at the December meeting.

By divesting assets including the Business Property Lending Inc. unit and its Irish mortgage business, GE Capital reduced its ending net investment, a measure of its size, to $419 billion as of Dec. 31. That was a decline of 18 percent since the beginning of 2009 and exceeded the company’s December 2011 forecast that the measure would shrink to $440 billion last year.


Consumer Lending

The new compensation plan gives Immelt incentive to further shrink the finance unit, perhaps by separating the private-label credit card business, and to make acquisitions to fortify the industrial divisions, said Steven Winoker, a Sanford C. Bernstein & Co. analyst in New York, who has a market-perform rating on GE stock.

“On the GE Capital side, it raises the motivation to divest some of it or spin some of it off,” Winoker said in a telephone interview. “They don’t have to spin all of it off -- there are reasons to think they could just spin off the consumer piece, for example.”

In addition to reducing GE Capital’s balance sheet, the 2010-2012 pay program gauged performance based on the industrial units’ return on capital and cash flow from operating activities as well as earnings-per-share growth. GE’s operating earnings climbed about 8 percent to $16.1 billion, or $1.52 a share, last year. The company earned $1.31 a share on that basis in 2011.

GE climbed 39 percent during the last incentive program, outpacing a 28 percent increase by the Standard & Poor’s 500 Index and a 26 percent gain by the Dow Jones Industrial Average. The shares have advanced 11 percent this year to $23.24, as of the close of trading today in New York.

Immelt’s success over the next three years will help set pay for about 1,000 top GE employees participating in the long-term incentive compensation plan, including Chief Financial Officer Keith Sherin, Global Growth and Operations CEO John Rice, GE Capital CEO Michael Neal and General Counsel Brackett Denniston.

GE agreed to sell its 49 percent stake in NBC Universal to Comcast Corp. on Feb. 12 and announced plans to increase the size of its share repurchase program to $35 billion the same day. The divestiture will also give the company “the flexibility to do more M&A,” Sherin said in a conference call with analysts at the time.

After an initial sale of 51 percent of NBC Universal in December 2009 for $9.8 billion in cash, GE embarked on an acquisition spree that included Dresser Inc. and the well- support division of John Wood Group Plc. Those deals helped the oil and gas division’s revenue grow by 57 percent since 2009 to $15.2 billion last year.

“It’s a big ship and it takes a lot to change course when you’re that size, and that’s why they’re attacking both shrinking the financial business while growing the industrial side,” said Christian Mayes, a St. Louis-based analyst at Edward Jones & Co. who has a hold rating on GE.


Bloomberg News


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