Question 04: Comment on GE’s use of Restrictive Stock Units (RSU) and the use of stock-based options? Why did the compensation committee change their position on the use of stock options - and grant options to top GE executives and to Immelt?
Previously the company GE used stock options and RSUs as a part of the organization’s long term compensation package for the executives. The system of allotting RSUs and stock options was granted to key performers and the employees who delivered superior services. However, this system was changed to provide this incentive or benefit to the CEO Immelt and the top executives. The system was changed in 2003, and the stock options were only for the top executives and the CEO. However, in 2009, the system was changed and 4400 executives were offered RSUs and stock options to retain top and high performers within the company. Immelt was given $2 million in 2010 which will vest 50% after 3 years and the remaining 50% after 5 years.
Question 05: How would you vote on Immelt’s pay package? Please provide fact-based analysis and evidence to support your recommendation.
The pay package of Immelt was not entirely based on performance. In fact, it was more about making him stick with the company as Immelt was offered a reputed position in Obama administration. Under the new pay system, Immelt was given more options at low prices without any shareholder protection features. The problem with this method was that it was not completely aligned with the company stock options. The company GE defended their decision by saying that ISS valuation does not provide the complete significance of Immelt’s performance and compensation.
Alternatives
Should General Electric compensation committee change its plan to obtain a “yes” from ISS?
Should GE stay firm and wait for the shareholders to support on pay vote
Recommendations
Out of the two options presented in the case, recommended is that the company changes the pay system to suit the best interest of the company. As the case states, the best or the most feasible practice is to align equity programs transparently and directly with the performance system. The reason it is the best option because shareholders might argue with the existing system where the compensation is given based on other factors rather than performance. If the company is not performing upon the required standards then none of the executives or the CEO should be eligible for any increase in pay.
The problem arose because Immelt was handed over $ 2 million as stock options in 2011. With shareholders increasing interest in the internal matters of the company they tend to negate and vote against pay plans. The current system was installed because General Electric did not want to lose Jeff Immelt to the Obama administration therefore they changed the entire system and launched the new pay vote. Another problem with General Electric was that the grants were not perfectly aligned with the performance. In fact it was solely aligned with company stock. Therefore, the provided $2 million to the CEO Jeff Immelt can be reconsidered and should be aligned in accordance with the rules of ISS. The company instead of defending the decision should rethink the system again.
Despite the argument by the company was a positive one where they argued that Immelt received a pay increase of 6.4% since 2007 but still the problem over here is that since Immelt has been offered a strong position with Obama administration, he might want to switch his job, to actually stop him GE, MDCC launched a new pay system..................................
This is just a sample partial case solution. Please place the order on the website to order your own originally done case solution.
Related Case Solutions & Analyses:
Caijing Magazine (B)
What to Do Against Disruptive Business Models (When and How to Play Two Games at Once)
Henkel Iberica (B)
Chinese Medicine in an Emerging Market
Arbitration Between Foreign Investors and Host Governments
Susan Griffin: Formulation of a Long-Term Investment Strategy
Andrew Ryan at VC Brakes
University Health Network (UHN): The MOE-MAR Initiative
GM Powertrain Case Study
Britain’s National Health Service Jettisons Choose and Book System
