The deal Nelson Peltz's Trian Fund Management struck with General Electric after 'intensified' talks promises to boost the bonuses of CEO Jeffrey Immelt and his senior management team by 20% if they meet new performance targets -- and to cut the incentive payouts by the same amount if they fail.
The Boston-based conglomerate set a goal for industrial operating profit of $17.2 billion in a Wednesday regulatory filing that cited talks with the New York-based activist hedge fund; it also agreed to reduce structural costs in its manufacturing businesses by $1 billion this year and next to $22.9 billion.
"We are pleased with the new framework that GE announced," Trian said in a statement, and "we will continue to hold management accountable to its commitments." The asset manager, whose $2 billion stake in General Electric makes it the 13th largest stockholder, said the goals were designed to help ensure GE meets its 2018 earnings target of $2 a share -- a 34% climb from last year.
"Trian invested in GE in 2015 because we liked its industrial businesses, appreciated the initiative to separate GE Capital and believed management would meet its public commitment to shareholders" for 2018 profit, the hedge fund said.
While the value of Trian's GE stock has climbed 16% since its initial investment in October 2015, as Immelt pared most of the once-sprawling GE Capital lending business and focused on digital manufacturing, the increase trails a 20% gain on the Standard & Poor's 500 and a 25% spike on the blue-chip Dow Jones Industrial Average.
The modified bonus structure for this year detailed in GE's filing applies to Immelt and each of his direct reports at the senior vice president level and higher. The increases or cuts apply if the company meets, or misses, respectively, both the profit and cost-cutting targets. If the company meets only one of the targets, bonuses won't be affected, according to the filing.
"Trian's an engaged shareholder that wants management to be on the same page," said TheStreet's Jim Cramer, who holds GE stock in his Action Alerts PLUS charitable trust. "They got that, but they'll be impatient unless they get the big headcount cuts."
Immelt has emphasized in the past year the company's efforts to make sure pay is appropriately linked to performance. With flat manufacturing profits in 2016 as lower crude prices hammered the oil and gas business, executives received just four-fifths of potential compensation, he wrote in his annual letter to investors.
"Normally, we expect our diversified model to shrug off headwinds in one market and continue to achieve our goals," Immelt wrote. "In 2016, we simply couldn't outrun pressure in the resource markets. Consequently, our compensation plans only paid out at 80% of target. This gives us more motivation for 2017."
Trian declined to comment on what failure to meet the new goals might mean for Immelt beyond the bonus reduction. The 61-year-old took the helm from Jack Welch in 2001 and has weathered challenges from the 9/11 attacks that destroyed World Trade Center buildings insured by GE to the 2008 financial crisis that froze credit markets on which GE's lending business relied for funding.
Immelt, who earned $27.5 million last year, has spent years refocusing the 124-year-old giant founded by Thomas Edison on its industrial roots, emphasizing digital manufacturing and businesses like jet engines and locomotives while selling NBC and pulling away from lending.
Still, with the CEO "likely in the final inning of what we see as a rather unspectacular 15-year run, it will likely be Mr. Immelt's successor who reaps the rewards of an improved GE," Scott Davis, an analyst at Barclays, said in a note to clients on Monday.
The conglomerate's next leader "will inherit a transformed, simplified portfolio with optionality to do more," Davis wrote. "GE Capital has been shrunk down to its core financing subsidiaries, the power business has been beefed up with the Alstom acquisition, and non-core assets are quickly being sold off."