CEO Compensation at GE: Decade with Jeff Immelt Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Question 01: How had Jeff Immelt performed in the face of GE’s challenges? How much of GE’s trouble stemmed from uncontrollable events and how much from GE management decisions under his control?

When Jeff Immelt took over as the CEO of General Electric on 7^th September 2001, the company was in a stable position in terms of its financial revenues and the operations. However, after four days at the job as the CEO replacing Jack Welch, the country was struck by the terrorist attack on the World Trade Centre. The incident struck the economy of United States with a severe setback which followed with the recession. The performance of Jeff Immelt has been a notable one and although he has faced severe challenges in the initial phase with the stock prices, dividends prices, deferred stock prices all were at a decline for a certain period of time. However, things finally changed in 2010, where the company earned a profit of $161 billion and also generated a cash of $172 billion from its operational activities. This amount was double as compared to the previous decade. Since his efforts were quite significant and appreciating, the board applauded Jeff Immelt and awarded him with a stock option and a bonus in 2010. For his tremendous performance he was given a bonus of $4 million in 2010.

The main problems which occurred in the company under the leadership of Jeff Immelt were mostly caused by the uncontrollable events and factors. The external factors were the main cause and reason for the decline in share price and revenues for the company. The board members, shareholders were all worried with the new leadership of Jeff Immelt who had to take the company out of the major financial and economic crisis once in 2001 and then in 2008.

The GE management decisions under the control of Immelt were also not accurate and precise in the initial phase of his leadership. As the case states, in 2008, Immelt assured every investor that the company GE was on track suddenly things changed and the earning estimated and poor Wall Street performance resulted in loss of credibility for the CEO. Immelt mainly invested in financial services affiliate where GE capital increased by 50%. This made the company rely and focus on financial services which eventually exposed the financial sector fortunes. The basic reason which made the slump against Immelt and General Electric was that the new financial system of GE Capital backfired. The expected results were not obtained and the decision was sole responsibility of Jeff Immelt. The company also faced losses in real estate where they lost $1.5 billion and $1.8 billion in 2009 and 2010 respectively. The company also reduced the dividend amount in 2010. This made the stock price reach below $9. Therefore to overcome the issue, Jeff Immelt infused $3 billion at a dividend of 10 %.

Question 02: Was Immelt’s past pay packages constructed to truly pay for performance? Would his new pay package focus him on the right metrics to deliver long term growth and results?

The previous pay package was in fact truly based on the high performance of Jeff Immelt. This is the reason that Immelt did not receive bonuses for the year 2008 and 2009. Finally, he got a bonus of $4 million in 2010 because of the overall improvement in the company’s financial position. He was awarded a bonus because the earnings growth for the year 2010 was 15% and the GE Capital ending net investment decreased by 9%. A record of $175 billion was recorded. This was the basis on which Immelt was given a bonus. However, since 2008 there has been no pay increase for Immelt because the company was not performing as it should have done being such a large multinational company.

The performance system or the pay system which was revised in 2009 by MDCC was changed completely. Now Jeff Immelt had to meet the CFOA growth of 10% or exceed this limit in order to become eligible for the bonus. He once had to meet the goal of $70 billion in GE industrial CFOA. This was something that was transformed from being performance based, to entirely opposite now. Under the new pay system, Immelt will not receive any PSU grants. However, other various perks and privileges were introduced by the company to facilitate the CEO and the top hierarchy and the executives.

Question 03: Comment on the Compensation Committee (the MDCC) challenge to the ISS recommendation to vote “no” on Immelt’s pay package. Does the MDCC make valid and fact-based arguments?

Despite the arguments made by the MDCC to the ISS are quite strong and may change the decision of pay vote of the shareholders. However, there are certain issues with the proposed argument that makes it difficult.................

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When the ISS, a major shareholder advisory group recommended "no" vote on the award, Jeff Immelt 2 million stock options in April 2011, the compensation committee of GE was to decide whether to cancel or amend the decision or ignore the ISS recommendation. Immelt was paid in 2010, according to its performance? As if shareholders vote on the advisory "say on pay" vote at the annual meeting issue GE in April? "Hide
on VG Narayanan, Lisa Brem Source: Harvard Business School 24 pages. Publication Date: July 12, 2011. Prod. #: 112003-PDF-ENG