To cope with the gravest safety crisis in its history, General Motors has spent freely — almost $3 billion — to compensate accident victims and recall nearly 30 million vehicles.
But when the company closed the books this week on last year’s recall-plagued financial results, Mary T Barra, its chief executive, had one more costly decision to make: Should the decade-long failure of executives, engineers and lawyers to address deadly defects in millions of cars result in a smaller annual bonus for GM’s blue-collar workers?
On Wednesday, GM chose to once again open its checkbook. For the first time since emerging from bankruptcy in 2009, when it received a $49 billion bailout from taxpayers, GM gave its 48,000 union workers a bonus greater than their contract called for.
Each worker will receive up to a record $9,000 in profit-sharing, even though the company’s actual profits were diminished by the cost of more than 80 recalls and warranted a payment that would be about $2,400 smaller.
“I thought the recalls were going to kill us,” said George McGregor, president of the United Automobile Workers local at GM’s Detroit-Hamtramck plant. “We had the big check coming. We shouldn’t have to pay for their defects.”
Barra was unavailable for interviews on Wednesday. A company spokesman, Tony Cervone, said the decision to bolster profit-sharing came after executives concluded that excluding its avalanche of recalls, GM had reached its financial targets and needed to reward factory workers who punch the clock in its plants.
“If the targets were not met, then obviously no consideration would have been given,” Cervone said. “The decision was ultimately Mary’s; it’s fair to say she led it.”
The higher payout also helps GM negotiate a new union contract this summer without being accused of shortchanging workers for problems they did not cause.
The UAW’s new president, Dennis Williams, said the profit-sharing cheques were important to the long-term relationship between the nation’s largest auto company and its plant workers. “General Motors’ announcement leaves no doubt about the strong environment the GM-UAW collective bargaining agreement created,” Williams said in a statement.
The bonuses are another example of GM’s willingness to spend money over the last year as it grappled with a safety crisis. The automaker, for example, reserved $400 million to compensate victims of faulty ignition switches that could cut off engine power and disable airbags in millions of its small cars. So far, the lawyer hired to administer the compensation programme, Kenneth Feinberg, has made settlement offers to the families of 51 people killed in switch-related accidents.
GM also offered financial incentives to consumers to bring recalled cars in for repairs, and spent heavily on outside lawyers to investigate how engineers, executives and others failed for years to fix an ignition switch they knew was defective.
Internally, the company incurred significant costs for legal fees and adding new safety personnel, as well as to pay secret severance agreements to people who were dismissed or retired in the wake of the ignition-switch scandal.
GM said its ultimate decision was not based on a formula in the contract. Instead, the company said the $9,000 figure was a combination of regular profit-sharing in addition to a $2,000 performance bonus.
The bonus was highly unusual, said Art Schwartz, a labour consultant who worked for GM for more than 20 years. But it represented something of an admission that GM management had caused the company’s safety woes, he said, and not the workers on the line. “It’s an acknowledgment of that,” he said. “If nothing else, it is a good-will gesture that takes the whole recall issue out of the equation.”
Outside the cost of the recalls, GM had a strong year financially, particularly in North America, where it said it earned a pretax profit of $6.6 billion. But without the recalls, the pretax earnings were $9 billion. One reason for the company’s health was the bankruptcy itself, which allowed GM to shed money-losing assets and restore its balance sheet, thanks to the bailout. The company’s contract with the United Auto
Workers union calls for it to pay about $1,000 in profit-sharing for each $1 billion in pretax earnings in North America.
When confronted with the final tally of earnings for the year, Barra and other executives decided union workers should be paid for how the company’s operations performed — and not be penalised for safety problems dating back years. The decision came after discussions between GM and the UAW.
The company also took another, unrelated step on Wednesday to appease another group affected by the mounting recalls — its investors. GM’s shares languished last year as the industry surged, and some of the underperformance could be attributed to spiralling recall costs. GM said its board planned to approve a 20% increase in the company’s quarterly dividend in the second quarter of this year. In trading on Wednesday on the New York Stock Exchange, GM’s shares climbed more than 5% to close at $35.83.
An open question is whether bonuses will be cut for GM’s legions of white-collar workers because of an overall drop in the company’s net income in 2014.
For the year, GM reported net income of $2.8 billion, a 31% decrease from $3.99 billion in 2013.
Also unclear is how the recalls will affect the compensation of Barra and other senior executives. Their pay packages — which consider factors like financial performance, market share and vehicle quality — will not be revealed until late spring, when GM publishes its annual proxy statement.