In very exciting news to us at The Motley Fool and to all investors, General Electric (NYSE:GE) announced that CEO Jeffrey Immelt will receive a new form of compensation tied to performance targets achieved over five years. And when the nation's number one company by market capitalization makes such a move, others may follow.
The board awarded Immelt 250,000 performance share units (PSUs) with a present value of $7.5 million -- 8.5% more than Immelt's 2002 salary and bonus. Half of the PSUs convert into GE stock only if GE achieves 10% average annual growth in net cash from operating activities over the period, and the other half only if total shareholder return meets or beats the S&P 500. Meanwhile, Immelt receives the equivalent of GE's 2.4% quarterly dividend on the number of PSUs.
Immelt will certainly do fine whether he meets the targets or not. He already earns a $3 million base salary, receives a bonus ($3.9 million in 2002), and collects over $200,000 in dividends on his 550,000 shares. Not to mention 4 million other stock-appreciation rights and stock options.
But the new incentive is hardly chump change, and it's a giant step in the right direction for aligning the top exec with shareholder interests. Sure, pay the CEO whatever salary and bonus the marketplace demands, but make part of the total package incentives to bring good thing to life for all shareholders.
Why not stock options? Besides that they are about stock price only and are invariably repriced anyway if the stock drops, the company said in a prepared statement that the CEO doesn't need retention compensation. Amen! For other employees that do receive options, GE was one of the first to say it would expense them.
We are positively giddy about this for two reasons. First, net cash from operations beats EPS hands down as a measure of company performance. The cash flow statement is a clearer indication of a company's cash-generating activities. (And this is why Tom Gardner hammers away at cash flow when he picks stocks for Motley Fool Stock Advisor and Hidden Gems.)
Second, it's a five-year period. This allows Immelt to care for the long-term health of the business and make investments that may not pay off today, tomorrow, next quarter, or even next year. As long as shareholders are better off in five years than the S&P 500, and the business is producing more green stuff, everyone is happy.
The board also improved compensation for senior execs. The whole package is a great move and puts GE at the forefront of improving corporate governance.
The Motley Fool led the charge for expensing stock options early on. We ran at least nine analyses in 1999 (Bill Mann directs you to all of them), for example, and eventually the world started to catch up. We screamed "cash flow statement" well before you started seeing "cash flow" in the mainstream financial media -- and even now it's usually undefined, though at least there. And while we can't claim to be first clamoring for management pay to encourage long-term thinking about the business, we've been in the right company with Berkshire Hathaway's (NYSE:BRK.A) Warren Buffett and others.
You can bet that something we're writing on Fool.com and in our stock advice newsletters right now is going to be mainstream next. Be first to know. Don't miss us. And may GE be starting a trend.
