GM Slashes Dividend and Executive Pay

America’s soon-to-be second biggest car maker General Motors announced yesterday that it was cutting its dividend and the pay of its executives in an effort to turn itself around. It’s amazing what can happen when an activist shareholder gets a voice on the board of directors. It’s even more amazing what can happen when a company has no choice.

General Motors lost $8.6 billion in 2005. High labor costs, rising raw material costs, competition from other (usually non-American) automakers and lousy SUV sales (the sector upon which GM has bet the farm) all contributed to the red ink. Something had to be done, and it all focused on money going out that shouldn’t.

Dividends are, of course, the best thing about investing in a company. Capital gains get more attention, but they can stem from mindless speculation as surely as from a properly run business. Dividends, on the other hand, can’t be paid unless a company is actually making a profit or has cash in the bank. Before it acted, GM had the highest dividend rate in the Dow Industrials at 8.3%. Since GM can’t make any money, paying money out to shareholders can only go on so long before there’s no cash left. Eliminating the dividend would have upset too many apple carts, but it would have been a more effective measure.

At the same time, Reuters reported that “The salary of GM Chairman and Chief Executive Rick Wagoner will be halved, while Vice Chairmen John Devine, Robert Lutz and Fritz Henderson will see their salaries cut by 30 percent.” This will not bring GM back to profit, but it does get the point across that management understands there must be sacrifice all around if the company is to get back to profitability.

Billionaire investor Kirk Kerkorian, GM's largest single shareholder and renown shareholder activist, had a pal of his, Jerome York, voted onto the board at GM on Monday, and “magically” this package came out. Mr. York is also on record as saying GM needs to drop its “non-core” brands like Saab and Hummer, so expect these to be sold off in the coming months.

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