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Summary

  • The unprecedented recalls by GM are costing billions, its compensation policy could exacerbate this.
  • GM has enacted a "whatever it takes" policy to try and get out from under the ignition switch issue.
  • Shares are still holding up fairly well and could still be a great long-term investment.

In the wake of failing to fix the decade-old ignition switch defect that caused several deaths, General Motors (NYSE:GM) is trying to compensate with its no-cap compensation policy. On Monday, super-lawyer Ken Feinberg announced that General Motors will try to compensate the financial and emotional loss suffered by the victims' families in its best possible way, without putting a cap on such compensation. It is noteworthy that the compensation policy was declared a day before the company's latest recall of 8.4 million cars in North America, out of which 7.6 million cars are recalled for ignition defect.

A tale of two tracks

On Tuesday, GM released a 'Final Protocol' documenting guidelines for the compensation to be paid for certain death and physical injury claims in relation to its 'Ignition Switch Recall.' According to the protocol, GM has given the responsibility to process and evaluate claims to Feinberg, under the created Claims Resolution Facility. According to the laid out protocol, the eligible claimants will be able to opt for one of the two methods, that is, presumptive compensation or the other one based on complete economic analysis.

While the first method will calculate the economic loss based on certain presumptions, the second mode of pay will include a comprehensive analysis of descendents' earning history and future economic value on a case by case basis. Apart from redeeming for the economic loss, GM will also compensate the victims for their emotional loss by paying $1 million as a base compensation plus $300,000 for each surviving spouse or dependent.

Other than this, GM will pay hospitalization costs starting from $20,000 for a single night up to $500,000 for over a month costs for physical injury claims. Feinberg said, "They're funding it without any cap on the aggregate amount of money that's going to be available."

Taking It To Court

Claimants can apply for compensation starting August 1, 2014 and will have time till the close of the year to do so. Also, as per the protocol, claimants would have to extinguish their right to sue GM or seek punitive damages, once they are being compensated. Though GM has tried its best to address the loss of grief stricken families, CNN Money reports that there are two families who are considering taking their cases to court instead of accepting the offer. One of the family members of the victim, Beth Melton, said, "We want to continue with our civil case against GM and get at the truth of what happened."

Conclusion

Despite the fact that GM has tried to restore the families of victims financially, there's still the human loss. It will remain a question of how the market views GM, with respect to trying to close the decade-old case with a $1 million handout to the victims' families. Regardless, shares are holding up. The stock is only down 8% YTD, whereas top comp Ford (NYSE:F) is up 11%. GM's p/e ratio to growth rate is a low 0.56 (compared to Ford's 1.0) and shares only trade at 8x next year's earnings estimates. You also have a 3.3% dividend yield. It appears that GM is a rare growth at a reasonable price and income play.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: GM's Compensation Policy In Perspective