GM Slashes Exec Pay, Dividend

February 7, 2006

Everyone from investors to top management will share the pain as General Motors takes new and drastic steps to stave off a financial meltdown, the automaker announced Tuesday.


The troubled giant will slash its dividend in half, abandon its traditional, company-funded pension plan for non-union workers, cap health care benefits for over 100,000 salaried retirees, and even cut executive pay by as much as half. Still more cuts could follow, CEO Rick Wagoner acknowledged during a hastily scheduled news conference.


The embattled executive denied that GM had simply caved in to the demands of its largest investor, billionaire Kirk Kerkorian, and his top lieutenant, Jerry York. But many of the moves, approved by the company’s board of directors, echoed demands outlined in a January 10th speech by York, who was also appointed to the GM board on Monday.


“It is clear to me what we need to do,” Wagoner said, though he quickly added that, “It is also hard because it affects a lot of people. I don’t take these actions lightly.”


The world’s largest automaker went $8.6 billion into the red last year, reflecting a sharp decline in sales and market share, and the hefty investment in incentives needed to prevent even further losses. The figure also included some of the costs from a turnaround plan announced last November, which will see the closing of five assembly lines and still more component facilities, along with the elimination of 30,000 jobs.


If those moves focused primarily on GM’s blue-collar workforce, Tuesday’s announcement took aim at other “stakeholders”: 


*By cutting the dividend in half, to 25 cents per quarter, or $1 annually, GM expects to save about $550 million, Wagoner stated;


*Capping the health-care benefit plan for U.S. salaried retirees should trim the company's liability by about $4.8 billion and annual health-care spending by almost $900 million before taxes;


*The automaker will move to a defined contribution plan, rather than its current non-union retiree program, echoing steps taken recently by other industry giants, such as IBM;


*Wagoner revealed that his own pay will be cut in half, while other senior executives will see their salaries trimmed by at least ten percent.


Combined with other, previously announced moves, Wagoner said, GM now hopes to reduce its structural cost base from 35 percent of revenues in 2005 to 25 percent by 2010.


Last November’s cuts prompted a generally negative response from Wall Street, which had been hoping for even more aggressive measures. Investors again drove down GM stock Tuesday, by 2.27 percent, with shares closing at $22.81, a 53-cent decline.


But David Healy, of Burnham Securities, was reasonably upbeat. He said the dividend cut was “long overdue.” If anything, he added, “from a strict financial basis, they probably shouldn’t be paying a dividend at all. This was a good compromise.”


Union workers were the only “stakeholders” not directly and immediately impacted by GM’s newest cutbacks. But as one analyst suggested, the announcement was, “a shot over the bow” of the United Autoworkers Union, which isn’t scheduled to go back to the bargaining table with GM until 2007.


Wagoner agreed. “It is clear, now more than ever, that we have a shared fate.”


For his part, UAW president Ron Gettelfinger said, “GM did the right thing.” But while speaking to reporters during a break in a legislative conference in Washington, D.C. , he insisted, “We've done our share,” with recent retiree healthcare cuts expected to save about $1 billion annually.


“Let me be clear,” the union boss emphasized, “we're not going back into negotiations as far as concessions go.”


Perhaps that will be the case, though industry observers suggested that there are a variety of ways the UAW could quietly assist the troubled car company, such as encouraging more of its members to take corporate buyouts, and by implementing new procedures to boost productivity at GM plants.


There’s no question that GM needs to curb its losses fast. According to York , the automaker has enough cash on hand to operate at the current “burn” rate for just 1000 days.


Many of the steps approved by the GM Board on Monday echo demands outlined by Kerkorian’s proxy during his January speech in Detroit . Wagoner, however, argued that many of the latest cuts had been under study for quite some time. Indeed, GM hinted pension and healthcare cuts were being planned during a meeting with analysts on January 13, recalled Burnham Securities’ Healy. But Healy also believes the dividend cut might have been meant as a sop to York and Kerkorian.


One proposal outlined by York was notably ignored. During his January speech, GM’s new board member had suggested that the automaker should “euthanize” some of its weaker brands.


On Tuesday, Wagoner countered that such a move would be too expensive, and would ultimately result in still more losses in GM’s market share — as it did when the Oldsmobile brand was abandoned. The right approach, the CEO countered, is to invest in the products needed to rebuild such damaged brands as Pontiac and Buick.


Last November, Wagoner seemed to suggest GM had done what was needed to staunch its financial losses and begin the painful turnaround process. But when asked on Tuesday if all the cutting is complete, he had a very different response.


“Do I expect there will be additional actions? For sure,” said GM’s chairman, “there will be.”

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