Rolls-Royce Freezes Pay for 8,000 Managers as Profit Tumbles

(Bloomberg) -- Rolls-Royce Holdings Plc will freeze salaries for 8,000 managers as Europe's biggest aircraft-engine maker deepens cost cuts after earnings fell by almost half in 2016.

While raises for managers and executive staff will be announced as usual in March, they won't be implemented until September, with no backdated payments, Chief Executive Officer Warren East said in an internal message to staff, which was disclosed to Bloomberg and confirmed by the company.

East is extending cost cuts after underlying pretax profit fell 49 percent to 813 million pounds, with only a “modest” gain expected in 2017. The CEO, who has also eliminated 700 middle-management posts, opted to delay the raise rather than make a smaller award earlier so that future gains will accrue from a higher base, Rolls-Royce said. Factory workers and engineers aren't affected.

“We have maintained reasonable increases for the last few years and this will enable us to continue to invest in the program and capabilities that will make us a more resilient business,” Rolls said in response to questions from Bloomberg. The salary deferral was included in 2017 cash forecasts, with the company targeting free cash flow similar to last year's 100 million pounds.

The move could save about 15 million pounds ($19 million), based on 2016's 2 percent average wage award, with proceeds helping to fund higher output of engines for Airbus Group SE's A350 and A330 jets, as well as other projects.

Bonuses Due

Rolls-Royce shares rose as much as 2.1 percent and were trading 1.2 percent higher at 777 pence as of 10:58 a.m. in London.

The pay freeze comes after employees qualified for their first bonus in three years in 2016, with the earnings decline less than Rolls and analysts had forecast. The company will return to its normal payment schedule next year, assuming medium-term expectations don't change.

East has been working to restructure Rolls-Royce as its earnings suffer amid a slump in sales of marine propulsion gear tied to the decline in oil prices, lower sales of engines that power regional and corporate aircraft, and reduced utilization of some older planes powered by its Trent-series turbines, which has led to a decline in maintenance revenue.

The CEO has also appointed a new executive team and refined reporting lines to make the engineering giant more responsive to market shocks. At the same time he's seeking to steer Rolls through an unprecedented production ramp up as it churns out engines for the A350, on which it's the sole supplier.

East said in last week's earnings presentation that he's also turning to a strategic review of the group's operations that could potentially lead to the sale or restructuring of 20 percent the business, with conclusions to be announced later this year.

Rolls also faces costs from an agreement last month with the U.K. Serious Fraud Office and U.S. Department of Justice to defer prosecution on allegations of bribery and corruption spanning three decades. The company has agree to pay 671 million pounds in fines spread over five years.

To contact the reporter on this story: Benjamin Katz in London at bkatz38@bloomberg.net.

To contact the editors responsible for this story: Chris Reiter at creiter2@bloomberg.net, Christopher Jasper