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GE: When Execs Outperform The Stock


When veteran recruiter Peter D. Crist tried to woo a hotshot from General Electric Co. (GE) about 18 months ago, the GE executive pressed hard about the potential upside of the stock options he would be leaving behind. Earnings were looking up. GE had expanded into cutting-edge areas such as wind power and bioscience. Innovation was the mantra and people were pumped, with some even talking about a share price that would almost double again, to 60.

With that kind of payoff on the horizon, there was little incentive for him to leave. But when Crist recently resumed discussions with the exec, his optimism about GE shares had faded. If the recruiter's client was willing simply to match the current value of the stock he owned in 2004, he would consider a move. It was the first time Crist had ever seen GE staffers view the stock as a diminished currency. In his view, "If you don't see movement by the end of this year, it could become a real issue in [staff] retention."

Within GE, two beliefs have long been held sacred: talent will be rewarded, and GE stock will make you rich. The first tenet remains as high a priority under Chief Executive Jeffrey R. Immelt as it was under his predecessor, Jack Welch. But the stock hasn't made anyone rich in years and, at less than $35, is worth less than when Immelt took the job in September, 2001.

It's a particularly sore point in a performance-driven culture like GE's. This is the place that famously culls the bottom 10% of staff and vigorously rewards its stars. More than 36,000 employees have participated in GE's stock option program, with the top tier of 180 executives having the potential to receive more than half of their pay in equity. While GE's share price hasn't prompted an exodus, it blunts a potent compensation tool and shows signs of affecting a culture long used to assuming it's the best.

The frustration is palpable in the senior ranks. At GE's annual gathering of its top brass in Boca Raton, Fla., this year, one attendee laughs that stock performance was "the unofficial theme." Then he stops himself: "I guess it's not that funny." Being a victim of broader market trends is one thing. Under-performing the Standard & Poor's 500-stock index by 7% in 2005 is quite another. "It's a bit demoralizing," he says, "especially when you're doing everything else right."

A top-level executive at another company says the prolonged price drought has dampened expectations about what it means to be GE. "A few years ago, [executives] acted like having a stock price in the 30s was a blip," he says. "Now, they're realizing the real blip was what happened in the late 1990s. Some of them may never see those highs [60] for the rest of their career."

So what's a CEO to do? Immelt starts by talking about it -- a lot. In many a public forum these days, he's first out of the gate in expressing his disappointment and frustration with the stock price. He raises it at employee town halls. He brings it up at investor meetings, even student groups. "You can tell this really grates on him," says one staffer, who received a grant of options and restricted stock about two years ago.

Efforts to boost growth and creativity are all well and good, but they have to pay off for the people who own the company. In the recent annual report, entitled "Go Big," Immelt cut to the chase. "The stock is currently trading at one of the lowest earnings multiples in a decade," he wrote. "We have good results and good governance. What will it take to move the stock?" Good question. Immelt clearly feels it's time for the market to wake up. As he pointedly writes: "We earn significantly more income and generate substantially more cash than we did when the stock traded at an all-time high."

To pump up enthusiasm, Immelt has, as he likes to say, put more skin in the game. The GE chief has been steadily beefing up his portfolio -- purchasing 30,000 shares in January for almost $1 million and buying another 15,000 shares on Mar. 13 for $502,960. That's in addition to a high-profile move in February to convert his $6 million cash bonus for 2005 into so-called performance share units. Half of the units will convert to stock if cash flow from operations grows an average of 10% or more over the next two years. The other half will convert into shares if returns at least match those of the S&P 500 during the same period. He could get almost 180,000 shares -- or nothing. "He's willing to take $6 million in pocket and put it on the line," says William J. Conaty, GE's senior vice-president of corporate human resources.

Then again, this is a man who is likely to spend at least 15 more years in the top job. (Despite the stock doldrums, his board has been behind him every step of the way.) For other executives, sitting on a static nest egg could be more of a problem. Patience can wear thin and, this being GE, senior people are often seen as ripe for plucking to lucrative executive positions elsewhere. Even if GE's stock price picks up, as it has in recent weeks, the question is whether it can compete with the potential returns offered by rivals. Crist says GE has "lots of 48-year-old guys who know they're done." Their careers won't rocket much further at GE, and their opportunities to create real wealth seem to have stalled.

Conaty acknowledges the importance of the stock in overall compensation, but says the primary motivation for GE staffers remains "challenging jobs and a career path for personal growth." Even amid the tough stock run, the company has retained 97% of its top 600 executives -- "people we really care about and don't want to lose," he notes -- and hasn't seen "any crazy spikes in turnover" lower in the ranks. Conaty says GE continues to pay strong salaries and cash bonuses to top performers.

But the company has responded to the realities that its stock might not soar as it did during the tech boom. Stock recipients now get a mix of 60% options and 40% restricted stock -- a move that Conaty attributes to lackluster stock market growth. Even in a dud market, nobody emerges completely empty-handed. The company has also doubled, to 550, the number of top executives eligible for "contingent long-term performance awards." That means lucrative bonuses if the company meets specific financial goals over a three-year period that are seen to "contribute to shareholder value." Simply getting tapped for participation in things like the stock-option program is often potent enough to keep people excited, Conaty maintains. "It's a signal from your leader that you're doing well." But everyone wants a payoff, too.

The fact that some analysts have boosted their expectations for GE's share price is some comfort to the troops right now. "It's realistic to expect it to outperform the S&P, as the fundamentals are very strong," says Ann Duignan of Bear Stearns & Co. (BSC)

Nicole Parent of Credit Suisse Group (CSR) is also optimistic, and understanding, arguing that "Jeff was handed a portfolio that needed a lot of strategic thought put into it." It's hard to win investor confidence when you're overhauling the portfolio and rivals like United Technologies Corp. (UTX) and Emerson Electric Co. (EMR) have posted better returns.

But A.G. Edwards & Sons Inc. (AGE) analyst Tony Boase perhaps best sums up the ethos of investors still waiting to see GE firing on all cylinders -- especially in the industrial businesses that account for about half of earnings. In his mind, 2006 is a critical year for proving that Immelt's rejiggered company can outperform its rivals. Investors will stay skittish, says Boase, "until the big machine really moves again." For Immelt, one key to doing that is convincing his people that the market will finally recognize their efforts.

By Diane Brady


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