GM Chairman Urges U.S. Treasury to Loosen Salary Caps for Bailed-Out Companies

General Motors (GM) board chairman Ed Whitacre spoke on Tuesday (10 November) evening at Texas Lutheran University, providing a number of comments about the current thinking of GM's board and the path that the new directors have set for the government-owned automaker. Chief among his remarks was the idea that the U.S. Treasury Department should consider loosening the salary cap restrictions on executives at companies that have received federal bailout loans. The government has imposed a US$500,000 cash salary limit for new hires at these companies, including GM and Chrysler, which has complicated the company's ability to hire top executive talent from outside the company. "To find top-level people where you need them, that's a more difficult thing to do at that salary level," Whitacre said. "I don't think [the caps] will be lifted, but hopefully they'll be modified." Under the current conditions of the salary cap, GM has seen its top executives take a significant pay cut from what they had been making. CEO Fritz Henderson will see his salary cut by 25%, from US$1.26 million to US$950,000 annually, not including stock options. The average for GM's top 25 executives has been a 31% pay cut, and only one other executive besides Henderson will earn over US$500,000 for 2009. The pay cuts were ordered by the Treasury's special designee Kenneth Feinberg, who has reviewed the salaries of executives at almost a dozen companies who have received federal funds, and ordered similar restrictions.

Whitacre's other comments touched upon GM's progress in restoring its business and the board's change of heart in selling the company's Opel brand to a coalition of Canadian supplier Magna and Russian financial institution Sberbank. The board reportedly examined the deal after the European Union (EU) alleged that Germany was providing financial assistance only to one possible investor, Magna, in the hopes of safeguarding jobs, despite the German government's claim that it was making funds available to anyone. "The catalyst for all this was the EU saying you only made the money available to one investor," Whitacre said. "The board did what they should have done and revisited the issue. We had to ask ourselves how we could be a global player and not play globally," he added. Whitacre also reiterated the board's support for Henderson and the rest of the management team, despite appearing to disagree with Henderson on the timetable for GM to offer up a stock IPO. While Henderson and other GM management have gone on record as pointing to the last half of 2010 as a possible IPO timeframe, Whitacre was more effusive. "Mr. Henderson and his team have the support of the board," Whitacre told reporters. "They understand -- we all understand -- what we have to do." But he said it was too early to set a timetable for an IPO. "It depends on how quickly we become profitable," Whitacre said. "I think we can see that on the horizon, but I can't promise a date." GM will report its third-quarter 2009 earnings on Monday, 16 November.

Outlook and Implications

The salary cap issue is important to GM due to its current struggle to replace its chief financial officer (CFO), Ray Young. The company was very publicly criticised for its apparently abysmal financial management skills by the head of the Presidential Autos Task Force in speeches and an essay published by Fortune magazine. There has also been rumour of considerable friction between Young and the autos task force, presumably due to the opinion of the Task Force on GM's condition. As such, the board has been trying to create a plan to allow Young to step aside and bring in a new CFO, but according to Whitacre, this process is being complicated by the salary cap. Simply put, GM cannot compete for top talent as long as its hands are tied from a compensatory standpoint. The salary caps for the recovering companies are patently ridiculous, as they only hobble those companies' abilities to attract top talent in the field. Companies that are struggling already have a difficult time attracting top talent to their executive ranks—one of the only ways to make such positions appealing is to have at least a competitive compensation package. If the salary caps applied to the entire industry, then they would make more sense, as the competitive playing field for executives would be level. But all the government has done is make the recovery of its investment that much more unlikely in return for some appearance of political responsibility and response at public outcry to executive salaries.