(Bloomberg Gadfly) -- Jeff Immelt's reign as General Electric Co.'s CEO was meant to herald an era of simplification, increased transparency and a better work environment at one of America's most iconic companies. It didn't turn out that way.
Overly optimistic profit forecasts, an SEC investigation into accounting practices and a surprise charge at GE Capital -- a unit thought to have largely been wound down -- have all taken a toll on Immelt's reputation and the company's credibility, not to mention its stock price. But Immelt exited with millions, whereas rank-and-file employees have tolerated a number of benefit reductions and policy changes that made GE's finances look better, often at their expense. And they aren't happy about it.
Among other things, employees were bothered by GE's decision about a year ago to delay pay in a way that improved the optics around cash flow. More than 70,000 U.S. salaried employees were affected. Current workers who were concerned about the maneuver contacted Bloomberg Gadfly, and Gadfly reviewed details of the previously unreported payroll shift. GE confirmed the change, but says the pay delay was part of an effort to simplify its payroll system and wasn't disclosed in regulatory filings because the dollar amounts weren't material to the company.
Changing pay schedules is neither illegal nor unprecedented; Duke University and the Nevada System of Higher Education made similar moves in 2001 and 2012, respectively. But in practice, delaying pay is akin to taking out an interest-free loan from your employees, says Charles Mulford, an accounting professor at the Georgia Institute of Technology and co-author of "Creative Cash Flow Reporting: Uncovering Sustainable Financial Performance." In GE's case, the timing of the one-week shift stands out.
The first phase of affected employees had pay that normally would have arrived in the final days of December 2016 pushed into January 2017. December previously would have yielded three paychecks under the old system, GE said in an email explaining the change to employees, so it would feel like typical month-over-month cash flow even with the pay delay. But that timing also meant the associated cash outflow was nudged into the New Year, making 2016 numbers look better just as scrutiny mounted over GE's financial state. A second group had pay normally due in the final week of the first quarter of 2017 pushed into the second.
In isolation, the payroll shift wouldn't be that noteworthy. But it provides a glimpse into the puts and takes that factor into GE's nebulous earnings metrics and offers insight into what multiple employees say is a pattern of nickel-and-diming.
Investors aren't known to care much about employees; after all, it's their push for ever-higher earnings that often sparks this kind of behavior in the first place. In the case of GE, shareholders should care. The turnaround CEO John Flannery is attempting will be challenging and relies on buy-in from employees. Culture matters; morale matters.
The impact on cash flow is unclear, but applying GE's reported global median salary of $57,211 from 2017 to the approximately 70,000 affected U.S. employees suggests a rough estimate in the range of $75 million across the two phases. The benefit was partially offset by interest-free transition loans that GE paid out to employees who felt particularly pinched by the pay delay and needed help paying mortgage, rent and credit-card bills, which are often due on the first of the month.
GE confirms there was a short-term cash flow benefit, but says that wasn't the intent of the payroll shift. It was trying to reduce overpayments and underpayments by moving to a system where employees were paid in arrears, and, according to the company, the change has been successful in that regard.
But with GE's cash flow under a microscope, every penny counts. Certainly, the payroll shift meant something to employees who saw it as one more burden in a series that they've endured seemingly to no avail as GE's downward spiral deepened.
GE stopped offering pension benefits for new hires starting in 2011, but the deficit still stands at $29 billion. The annual cost of providing health care and life insurance to its retirees has dropped by more than $1 billion since 2012 when GE announced plans to start walking back the scope of its benefit offerings. Employees are facing another $2 billion of cost cuts in 2018 and at least 12,000 job cuts after mismanagement of its power unit left GE's earnings goals in tatters.
Some employees say they were encouraged to participate in a bonus plan designed to be phased in over multiple years in place of a merit-based raise. They worry this will leave them shortchanged. Also, GE switched to an unlimited vacation day policy starting in 2015. It sounds great in theory, but wiped out employees' ability to bank unused vacation days -- and GE's obligation to compensate employees for those when they leave.
At this point in time, with GE's financial future so uncertain, all these cutbacks seem rather futile, and that's understandably frustrating for employees who have borne so much of the pain. They weren't blind to the potential financial benefits for GE from the payroll shift, but in e-mails announcing the change, the company seemed tone deaf as to the message it was sending and the irritation it was fostering. In hindsight, it seems offensive to put employees in the position of needing a loan from GE to cover their mortgage at a time when the company was spending money like crazy.
GE splurged on $22 billion of share buybacks in 2016, doled out a $4.3 million cash bonus to Immelt and increased its dividend to about $2.1 billion per quarter. Other outlays were smaller in size, but rich in symbolism. During the 2016 Oscars Red Carpet pre-show and ceremony, GE debuted three new TV ads in its "Owen" advertisement campaign aimed at recruiting software developers for its digital effort. The average cost for a 30-second spot during the 2016 Academy Awards was $1.72 million, according to Kantar Media. In January 2017, GE agreed to pay a reported $7 million-plus a year to feature its logos on the uniforms of the Boston Celtics.
The payroll shift and other cutbacks happened under Immelt, but the jury is still out as to whether Flannery will break the pattern. In his annual letter to shareholders, the CEO wrote that people who bet against the competitive drive and passion of GE employees "do so at their own peril." I don't doubt that GE has many talented workers, but its actions seem to have made it harder for them to believe in a turnaround. That's a tough reality to recover from.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.
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