General Electric (NYSE:GE) just paid chief executive officer Larry Culp a $47 million bonus. GE’s main union is furious over the payout. If you own GE stock, you should also be angry.
Here’s why.
GE Stock Target Lowered
Albany’s Times Union newspaper reported on Dec. 30 that GE’s largest union was furious about the bonus payout, suggesting that it was “absolutely outrageous” that the CEO would benefit while the rank-and-file got tossed to the sidewalk.
“How can GE justify this type of enormous bonus for its CEO, while workers, their families, and communities are suffering?” IUE-CWA president Carl Kennebrew told the Financial Times.
If you’re a GE shareholder, the fact that the company lowered his original 2018 bonus agreement target by 47% in August from $19 down to $10 — at a time when it was trading around $6.67 — is an indication of how desperate the board was to keep him around.
“Under Larry’s leadership, GE has made significant progress against the goals he set on day one as CEO: improving the company’s financial position and strengthening its businesses,” said a GE spokesperson on behalf of the board.
“We believe having Larry at the helm of the company for a longer period of time is unquestionably to the benefit of all shareholders and stakeholders.”
As part of the bonus agreement, Culp must stick around until August 2024.
I don’t know about you, but if I thought I could make $230 million over the next four years — GE stock has to hit $17 for 30 days, down from the original target of $31 — and still get paid an annual stipend for doing the job I was hired to do, I can’t imagine under what circumstances I wouldn’t play along.
These numbers are sheer lunacy. They represent a board that is completely out of touch with reality.
Let’s Not Forget Where GE Shares Were Before Culp
When Larry Culp took over as CEO on Oct. 1, 2018, GE stock was trading around $11 a share. As I write this, it closed at $11.36, slightly above where it was when he was hired.
People, including some of my colleagues, are convinced that GE’s worst days are behind it. InvestorPlace’s Larry Sullivan recently recommended GE and six other growth stocks he believes offer investors big gains in 2021.
“Like a lot of other companies, General Electric’s prospects will brighten as the global economy recovers from the pandemic’s downturn. As such, GE stock certainly has room to grow once that happens,” Sullivan wrote on Jan. 4.
I’m sure Larry Culp hopes so.
BloombergQuint opinion contributor Brooke Sutherland stated in December that it was puzzling for the company to lower the share price performance target for Culp, given it was seemingly delivering better financial results.
“Through a combination of asset sales, cost cuts and internal overhauls, GE is a healthier and more transparent company than it was when he started,” Sutherland wrote on Dec. 22.
“But while many (including me) have had their doubts at times, Culp has always been one of GE’s most prominent believers. It’s curious that this optimism didn’t extend into negotiations around his pay package.”
I couldn’t agree more.
It’s almost as if Culp put a gun to the board’s head and said, “if you want me to finish the job, you’re going to have to pay me.”
And pay they did.
The Bottom Line
The last time I wrote about GE stock was at the end of November. I felt that the easy pickings had already been gotten; the next leg up would be much more difficult. At the time, it was trading around $7.42. It’s up 41% in the past five weeks alone, topping out just over $11.
Frankly, I’m surprised it had that much gas in the tank, but as Sutherland discussed, the company’s free cash flow improvement — 13,000 job cuts from its aviation business definitely helped — has bolstered its share price.
When Culp signed on, people forget that he got a potential annual cash bonus of $3.75 million, annual equity awards in the form of performance share units (PSUs) of $15 million, and an annual salary of $2.5 million.
That’s on top of the potential $230-million payout for hitting $17.
If you consider that the $47 million in shares Culp is guaranteed — it’s traded above $10 for 30 days — amounts to $3,615 for every one of the 13,000 employees let go from its jet engine business, I’m not sure how anyone concerned about ESG investing would go anywhere near this stock.
In November, I argued investors should only buy GE in single digits. Now that I’ve seen its act of desperation on full display, I cannot in good conscience recommend you own its stock.
There are much better, more honorable companies to put your hard-earned money.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
