No. 5 — Eliminate Dividend Equivalents
The IUE-CWA Pension Fund, 501 Third Street, N.W., Washington, DC 20001, has notified us that its representative, Tony Daley, intends to present the following proposal at this year’s meeting:
“RESOLVED, that the shareowners request that the Board of Directors of General Electric (“Company”) adopt a policy that the Company will no longer pay dividends or equivalent payments to senior executives of the Company for shares they do not own.
“Supporting Statement
“The 2006 Compensation Committee Report discloses that the senior executives of the Company have received millions of dollars of “dividend-equivalent payments” on grants of equity compensation that they do not own. These are shares that the executives may never earn if the Company fails to meet certain performance targets.
“According to one report, CEO Jeffrey Immelt “received more that $1 million last year in dividends on unearned restricted and performance shares” (Wall Street Journal, May 4, 2006). In this context, the 2006 proxy statement discloses that Mr. Immelt had a total of 1.3 million units of restricted stock and performance shares as of December 31, 2005, which would amount to $1.3 million in “dividend-equivalent payments,” an amount equal to 40% of his 2005 salary of $3,225,000, if such payments had been made on all the units for all of 2005.
“The report of the Compensation Committee declares, “we have compensated the CEO with [Performance Share Units]... because we believe that the CEO’s equity-based compensation should be focused entirely on incentives for performance and alignment with investors.” It adds that the performance share units “will convert into shares of GE stock at the end of the five-year performance period only if the specified performance objectives have been achieved.”
“In our view, it is a blatant contradiction of the principle of pay for performance to give the CEO and other senior executives million of dollars in “dividends” over periods of up to five years for stock that they do not own now, and may fail to earn in the future. If the purpose of a grant of performance shares is to make compensation contingent on the achievement of specified performance objectives, as the Compensation Committee has said, we submit that no “dividends” should be paid on those shares until an executive has actually earned full ownership rights.
“In this context, there are at least two options. According to the Wall Street Journal report noted above, Pepsico, Sara Lee, and DuPont “withhold the payment of the accumulated dividends until an executive earns the shares.” It adds that other leading companies, such as Intel and Microsoft, “never pay dividends” before full ownership rights have been earned.
“Contingent pay should be truly contingent. Payment of dividends on shares not yet awarded violates the philosophy of contingent or performance-based pay.
“We urge shareholders to vote for this proposal.”
Our Board of Directors recommends a vote AGAINST this proposal.
The goal of our compensation program is to create long-term and sustainable value for our shareowners. An important component of our compensation program is equity incentive compensation. Since 2003, we have compensated our CEO with performance share units (PSUs) in lieu of any other equity incentive compensation because the Management Development and Compensation Committee and the CEO believe that the CEO’s equity incentive compensation should be fully at risk and based on key performance measures that are aligned with the interests of investors. Beginning with PSUs granted in September 2006, Mr. Immelt will no longer receive dividend equivalent payments on his PSUs, but rather, accumulate dividend equivalents equal to the quarterly dividends on one share of GE stock. Mr. Immelt is entitled to receive those dividend equivalents (without interest) only on shares he actually earns at the end of the performance period based upon satisfaction of the performance targets. If Mr. Immelt leaves GE prior to the end of the performance period, the PSUs and dividend accruals will be forfeited.
We also award restricted stock units (RSUs) to executives other than the CEO. RSUs offer executives the opportunity to receive shares of GE stock on the date the restriction lapses. In this regard, RSUs serve to both reward and retain executives, as the final amount of any compensation received is linked to the price of GE stock. During the restricted period, each RSU entitles the executive to receive quarterly payments from GE equal to the quarterly dividends on one share of GE stock. The goal of providing such dividend equivalent payments is to mirror the income generation associated with stock ownership. We believe our practices regarding the provision of dividend equivalent payments are competitive and provide the appropriate risk-reward balance for our senior executives. Therefore, the Board recommends a vote against this proposal.
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