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GM reduces pay, freezes benefits, halves dividend

THE BALTIMORE SUN

The yawning gap between the world's two biggest automakers widened yesterday as Toyota Motor Corp. posted record fiscal third-quarter profit and General Motors Corp. introduced a new round of cost-cutting to help halt its mounting losses.

"It's a case of the rich getting richer, and the poor getting poorer," said analyst Shelly Lombard at GimmeCredit, a New York corporate bond research firm.

GM, under pressure from billionaire investor Kirk Kerkorian to accelerate its turnaround efforts, said it would halve its annual dividend to $1 a share, cut Chief Executive Officer G. Richard Wagoner Jr.'s salary by 50 percent, trim the pay of several other top executives by 30 percent and freeze retired salaried workers' health benefits.

The cuts follow Monday's appointment of Jerome York, Kerkorian's adviser and a GM critic, to the Detroit automaker's board. Last year, GM lost $8.6 billion amid a steady decline in its U.S. auto sales.

Meanwhile, upbeat Toyota executives in Tokyo said quarterly earnings soared 34 percent, largely on the strength of its booming U.S. and Asian auto sales, to $3.3 billion. Revenue for the quarter that ended Dec. 31 hit a record $45.6 billion, a 15 percent increase.

"This underscores that the auto business isn't a terrible one, just that some companies have mismanaged while others, like Toyota, have done well," said Sean Egan, a corporate credit analyst at Egan-Jones Ratings in Philadelphia.

The Japanese automaker sold 1.98 million cars and trucks worldwide last quarter as vehicle sales rose 12 percent in North America and jumped 11 percent in Asia.

U.S. demand continued to be strong for Toyota's Prius gas-electric hybrid, Avalon sedan, full-size Tundra pickup and the new Scion aimed at younger buyers. Toyota is expected to surpass GM within a few years as the world's biggest automaker.

As gasoline prices rose last year, GM's sales slumped because of its reliance on big sport utility vehicles. Wagoner hopes to win back customers with redesigned SUVs and a revamped Chevy Impala sedan, but most analysts expect GM's sales in the U.S. to slide again this year.

GM has announced plans to close 12 assembly plants and facilities in the United States and Canada and eliminate 30,000 manufacturing jobs over the next three years, while Toyota is building factories in Texas and Ontario, Canada.

"It's what's going to keep happening," said George Magliano, chief auto analyst for economic consulting firm Global Insight. "We expect continued good earnings and growth from Toyota, and we're waiting for more from GM on more cost-cutting."

Wagoner said GM will cap its contribution to salaried retirees' health care coverage at 2006 levels and would cut its pretax health care expenses by about $900 million.

The cash savings will be about $200 million within five years and increase after that, GM said. The retiree health care cuts affect about 100,000 retired workers and 26,000 active salaried employees.

GM also said it would revise its pension plan for current salaried workers. Details of the new plan are to be announced next month.

On the pay front, GM will cut salaries by 30 percent for vice chairmen Bob Lutz and John Devine and Chief Financial Officer Fritz Henderson, and by 10 percent for General Counsel Thomas Gottschalk. All 11 outside directors, including York, will see their $200,000 annual stipends cut by 50 percent.

GM's cost-cutting steps "clearly follow Jerry York's playbook calling for an 'equality of sacrifice,' indirectly aimed at extracting [United Auto Workers'] concessions," Merrill Lynch analyst John Murphy wrote in a research note.

But UAW President Ron Gettelfinger said yesterday that GM's latest moves would not persuade the union to renegotiate the automaker's current contract. GM is expected to ask the UAW for more concessions when talks begin next year on a new contract. It doesn't want the UAW to be able to complain that it is being asked to shoulder the entire burden of GM's decline, analysts say.

Although many analysts were cheered by GM's efforts, some suggested the company isn't doing enough. Yesterday's changes "will modestly improve GM's balance sheet ... but the near-term cash impact appears to us to be minimal," Standard & Poor's auto equity analyst Efraim Levy wrote in a note to investors.

GM shares fell 53 cents to close at $22.81, and Toyota's shares rose $1.38 to $104.29. Toyota's total stock value is now $188 billion, 14 times higher than GM.

John O'Dell writes for the Los Angeles Times.

CUTS AT GM

Yesterday's cuts include:

Reducing GM's annual dividend to $1 from $2, saving $566 million a year. Pay cuts for GM's senior leadership this year and no bonuses for 2005. Chairman G. Richard Wagoner Jr. will take a 50 percent pay cut, to $1.1 million. He received $2.5 million in bonuses in 2004, the last year for which figures are available, and stock options for 400,000 shares. Vice Chairmen John Devine, Bob Lutz and Fritz Henderson will see their salaries cut 30 percent. A 50 percent drop in compensation for the 11 non-executive board members, to $100,000 (cash and restricted stock). A freeze of health care benefits for salaried retirees at 2006 levels. Starting in 2007, higher costs will be passed on to retirees for premiums, deductibles and prescription co-payments. The reduced benefits will affect salaried employees hired before 1993 and will lower GM's annual health care expenses by $900 million. Wagoner said the cash-flow benefit will be "limited initially," but will improve to $200 million in five years. In addition, GM will "substantially alter" pension benefits for current salaried employees, Wagoner said, freezing accrued benefits in the current plan and announcing a new plan next month.

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