The Treasury Department has announced a freeze in the pay of top executives of General Motors, as well as AIG and Ally Financial. All three firms are still partially owned by the U.S. government and received “exceptional assistance” from TARP. It is the second straight year Patricia Geoghegan, the government’s special master for TARP compensation, has elected to institute the pay freeze.
For 2012, the compensation of the CEO of each firm will be frozen at last year’s levels while cash compensation will be limited. Instead, the majority of earnings will be directly tied to company performance and be in the form of stock. In addition, the pay of the five senior executives and the next 20 employees with the highest pay will be cut by an average of 10 percent from 2011 levels.
The news will be difficult to justify for management and employees of General Motors, as the automaker reported record profits last year. In 2011, GM reported an annual profit attributed to common shareholders of $7.6 billion. Meanwhile, it’s stock — while down approximately 30 percent from IPO levels — has risen 22 percent since the beginning of 2012.
Even with the pay freeze, the top GM employee — who is not named but is presumed to be CEO Dan Akerson — will take home $9 million. The lowest-paid exec will walk away with $1.3 million. That, however, doesn’t tell the whole story, as GM needs to be competitive with the rest of the industry (and the world) in compensating high-ranking executives. Not doing so is universally understood to have serious repercussions on a company’s employee talent. Ford CEO Alan Mullally, for instance, took home a compensation package worth $29.5 million in 2011, an 11 percent increase from 2010. And Fiat/Fiat Industrial CEO Sergio Marchionne received a combined $22.5 million while declining payment from Chrysler.
The GM Authority Take
Even though GM is closer to being completely Treasury-free, this is what happens when one gets in bed with the government. In this particular instance, the government’s move seems somewhat shortsighted, given the fact that GM is doing very well — financially, and otherwise. So it would make sense to provide executives as well as non-executive employees with more inventives to continue doing their best in repeating the results and performance seen in 2011. Apparently, common sense isn’t the name of the game here.
In other words, the Treasury is saying: “You better do your best, because your pay plan depends on it… but we’ll make sure you can’t make too much, even if the company’s performance improves one hundred-fold.” Who knew performance-based pay could be capped?
The takeaway: it may be in the government’s best interest to continue compensating all of GM’s employees (not just the top elite), so that the share price will rise to levels necessary for the Treasury to exit without any losses (or even to make a profit). But good luck attaining top talent, making sure said talent performs at its absolute best, and achieving record anything with silly limits on performance-based compensation.