By many accounts, Larry Culp did an admirable job steering General Electric through a hazardous year. But was his performance in 2020 worth $73 million to GE investors?
We’re about to find out.
Most of the value of that compensation package can be attributed to an unusual retention plan that the Boston-based manufacturer’s board pledged to Culp in August — a potential bonanza that has come under fire in the weeks leading up to the company’s annual meeting on Tuesday.
CtW Investment Group, affiliated with the Change to Win union federation, on April 6 implored shareholders to vote against GE’s compensation for its top executives in 2020. CtW focused specifically on Culp’s contract extension. The vote, which wraps up at the annual meeting, is advisory only. But Michael Varner, who leads CtW’s executive pay research, said he hopes to send a message to GE’s board members to set the right tone for future years, and maybe even rescind or renegotiate the award.
Two leading proxy advisory firms, ISS and Glass Lewis, followed up with their own “vote no” recommendations. These “say on pay” votes are usually perfunctory. But maybe not this one.
The $73 million figure, as reported by GE in its March proxy filing, looks huge — the kind of payout that made Culp one of the best-paid public-company CEOs in the country in 2020. On paper.
In reality, it isn’t so simple: The figure mostly reflects the value of the restricted stock credited to him last year.
Culp could end up earning less — or much more. It depends on GE’s stock price over the next three-plus years, and if Culp sticks around.
Technically, Culp took home only $653,000 last year. That represented a big cut in his annual salary, a haircut that Culp volunteered for in light of GE’s struggles amid a global pandemic that grounded its cash cow, GE Aviation, in particular. Culp received no bonus, for the same reason.
He also was awarded restricted shares valued at $15 million that vest over a three-year period if the company hits certain performance targets.
Then there’s that unusual retention plan, a grant of millions in restricted stock tied to the highest average closing price for 30 straight days and a reworking of Culp’s original 2018 employment agreement to keep Culp on board through August 2024. When GE disclosed it in August, GE’s stock was trading in the $6 range.
GE values that plan at $57 million in the proxy. But Culp could recoup far more than that, if he sticks around for the full four years.
Culp would get 4.65 million shares that vest at the end of the four-year period if GE shares stay above $10 for 30 straight days. With shares trading above $13 now, that threshold has been met.
At the other extreme, Culp stands to receive 13.94 million shares if he stays for the full period, and the stock trades above $16.68 a share for 30 straight days. CtW calculates that maximum value at $232.5 million, by multiplying 13.94 million by $16.68. But GE says the value of the payout hinges on the stock price in August 2024, something that is obviously impossible to predict.
In the proxy, GE offered several reasons for rewriting Culp’s initial employment agreement: the additional time it will take for GE’s “transformation,” in light of the pandemic; the progress Culp has demonstrated so far in reviving GE’s fortunes; the board’s determination that Culp’s services are necessary for the turnaround; and concerns voiced by shareholders that the original terms didn’t provide enough of an incentive to keep Culp around, in part because of the pandemic’s negative impact on GE’s stock price.
However, you can count Change to Win and its affiliated pension funds among the shareholders that disagree.
CtW is upset that GE essentially halved the stock-price targets in Culp’s long-term plan, but kept the size of the payouts intact. Easier goals, CtW argued, should be followed by reduced potential payouts.
Varner said GE is one of only two companies being specifically targeted by CtW this proxy season so far over executive pay issues; the other is McDonald’s. (CtW also has the backing of IUE-CWA Local 201, a union that has launched an ambitious PR campaign to persuade GE to significantly step up its investments in its jet engine plant in Lynn.) CtW also recommended voting against reelecting the board members on GE’ s compensation committee.
A spokeswoman said the company values the feedback and views of its shareholders and “will continue to engage with many of them” on a range of issues, including executive compensation. GE, needless to say, does not agree with CtW’s recommendations.
ISS and Glass Lewis aren’t fighting the candidacies of any board members, but they are siding with CtW on the compensation issue
ISS, in its April 14 report, said lowering the goals without adjusting the payout is problematic. The next day, Glass Lewis said much the same thing, citing discomfort with keeping the payout size while reducing “shareholder value creation” — even after factoring in the extenuating circumstances caused by the pandemic.
Culp has worked hard to bring more efficiency to GE’s factory floors and more humility to the corporate culture. The pandemic delayed Culp’s turnaround plan, but he still sees a not-so-distant future in which GE soars again.
If Culp does succeed with his mission to revive GE, it’s hard to imagine many shareholders complaining. Even his max payout could pale in comparison to the tens of billions of dollars that could be added to the company’s total market value.
But that turnaround is not complete, not by a long shot. Varner argues that GE shareholders would be better served by waiting until it is before rewarding Culp for accomplishing his mission.