Advertisement
10/01/2011

Executive Rewards

So much for the sacred salary increase. Rising costs have grocery retailers and food manufacturers looking for ways to cut overhead, and often that means scrutinizing pay across the board.

At the same time, new executive pay requirements and disclosure rules passed as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which became law in 2010, mean companies must be more transparent about compensation.

As required by the act, the Securities and Exchange Commission adopted "say-on-pay" rules in January 2011 that specify shareholder advisory votes on executive compensation must occur at least once every three years starting with public companies' 2011 annual meetings. "It's a hot button topic," says David Larcker, professor at Stanford University's Graduate School of Business.

The SEC also issued rules requiring companies to disclose more information about so-called golden parachute compensation plans. "If there is resentment or people think things are being done in an inappropriate way, it will show up on say-on-pay or individual votes on directors," Larcker says. "It's an avenue for people to voice their concerns."

But it's not just the United States that's making waves about executive compensation. In the United Kingdom, supermarket giant Tesco announced in June that it's overhauling its executive pay practices after about 40 percent of shareholders voiced opposition last year, according to media reports. The company's annual report details its new plan, which streamlined executive compensation by reducing the number of performance measures, while focusing on earnings growth and sustainable return on capital. The company also "rebalanced" the CEO's compensation package to focus on performance-related achievements including Tesco's environmental sustainability, employee engagement and new store openings. By including a clawback provision, the corporate board of directors will have the ability to scale back awards if results are misstated, the report says.

"At the executive level, we will see more volatility [in performance metrics]."

– Scott Olsen,

PricewaterhouseCoopers

The more discussion about executive pay, the more performance metrics are likely to change, say experts. "At the executive level we will see more volatility," predicts Scott Olsen, U.S. leader of PricewaterhouseCoopers' Human Resource Services Practice in New York. Meantime, while the larger employee base saw salary freezes and benefits cutbacks during the recession, Olsen expects a return to some merit increases.

Closing the gap

The whole discussion about say-on-pay is sure to bring new attention to the gap between how much bacon executives bring home and how much rank-and-file workers are paid even as they are confronted with higher prices for gas, food and other essentials. "It's obviously a focal point for discussion and controversy," Larcker says. "When the pay differential gets really large, it's hard to tell the story, 'We're all in the boat together.'"

"In negotiations with unions for pay scales . . . the monster pay of the executives always comes up."

– David Larcker,

Stanford University Graduate School of Business


 

Ratio of CEO compensation to average worker pay
1965
24 to 1
1980
40 to 1
2000
300 to 1
Source: Economic Policy Institute

While most CEO compensation inched down in 2009 and 2010, it had climbed to historic levels prior to the recession. Research from the Economic Policy Institute indicates the ratio of CEO compensation to average worker pay climbed to 300 to 1 in 2000, from 24 to 1 in 1965 and 40 to 1 in 1980. That disparity can hurt morale and impact union negotiations. "In negotiations with unions for pay scales, obviously pointing to the monster pay of the executives always comes up," Larcker says.

On the flip side, offering workers incentive pay for meeting goals can boost productivity and retention. Whole Foods Market goes a step further, opening its books and sharing compensation information with workers, while using a pay-for-performance model for employees as well as executives, the company reports. The company also caps executive pay at 19 times the average worker pay, or about $650,000.

Whole Foods co-chief executive John Mackey has become the poster CEO for knocking down excessive executive compensation.

In the process, Whole Foods co-chief executive John Mackey has become the poster CEO for knocking down excessive executive compensation. While Whole Foods originally capped executive pay at eight times the average worker's wage, the company adjusted that multiple to retain executives. Last year, Mackey took a salary of $1 and total cash compensation of $45,969, while exercising options worth $77,178, Bloomberg Businessweek reports.

Count Mackey as an executive who apparently isn't in the job to count his gold. At some point, executives accumulate enough wealth that their compensation shouldn't be a driving force, he suggested in a 2009 Harvard Business Review blogpost titled, "Why sky-high CEO pay is bad business."

Total 2010 executive compensation of CEOs at leading CPG manufacturers
Muhtar Kent, Coca-Cola
$19,244,949
Ian Cook, Colgate-Palmolive
$14,177,997
Indra Nooyi, PepsiCo
$14,032,298
Irene Rosenfeld, Kraft Foods
$13,475,794
Robert McDonald, Procter & Gamble
$13,115,228
Douglas Conant, Campbell Soup
$10,140,701
Bruce Carbonari, Fortune Brands
$9,582,999
Thomas Falk, Kimberly-Clark
$9,028,180
Jeffrey Ettinger, Hormel Foods
$8,962,437
Donald Smith, Tyson Foods
$8,693,438
Kendall Powell, General Mills
$8,609,199
Gary Rodkin, ConAgra Foods
$7,581,462
A.D. David Mackay, Kellogg
$6,049,436
William Delaney, Sysco
$4,947,321
Gregg Engles, Dean Foods
$4,074,326
Marcel Smits, Sara Lee
$3,135,718
Source: Equilar, Redwood City, Calif. Compensation figures are based on data in company proxy statements. Total compensation includes base salary, cash bonuses, grant-date value of stock and option awards, and benefits and perquisites as calculated by Equilar.

While some experts attribute the run-up in executive pay to market forces, Mackey suggests corporate boards over-emphasize the importance of external equity while overlooking internal equity, which shows up in the form of employee morale and productivity.

Union issues

Although Whole Foods' compensation strategy has been effective, says Larcker, it wouldn't be an appropriate model for large players like Safeway and Kroger or for Costco, which is focused on low prices. What's more, while Whole Foods doesn't believe in unions, many of the largest grocery retail chains are union shops, which changes the dynamic entirely, he adds.

But even unions have lost some of their clout in the current economy, and it's unclear whether they will successfully make a comeback. Supply and demand in the labor market at a time of high unemployment rates means companies don't have to pay top dollar to retain workers. And with price-oriented discount grocery retailers among the fastest growing, the trend toward skimpy raises isn't expected to fade quickly.

On the retail side, with many entry-level and part-time jobs in grocery stores, 29 percent of workers are between the ages of 16 and 24. As a result, the Bureau of Labor Statistics reports, "Average weekly earnings for grocery store workers are considerably lower than the average for all industries." On average, non-supervisory workers made $340 per week in 2008, the latest year for which government data are available, compared with an average of $608 for all workers in the private sector.

On the manufacturing side, earnings for food production workers averaged $14 per hour in 2008, the Bureau of Labor Statistics reports, compared with $18 for all workers in private industry.

Justifying the end pay

Given the stagnant worker wages, how much pay is too much for executives is likely a question that will continue to be debated. The most egregious cases are covered by the news media, Larcker says. But by and large, most boards continue to believe CEO pay is justified. "When you look across the whole economy, are CEOs well paid? Sure, but it's a 24/7 job. They have lots of responsibility," he says.

"I don't think the whole pay system is broken," he adds. Executive pay of $1 million to $2 million is acceptable, Larcker says, "but there clearly are cases where you scratch your head and say how did they come up with these numbers."

Regardless of the actual numbers, experts say, fair compensation is all about alignment. If a business is doing well financially, workers at all levels would expect to see compensation increases. If profitability is an issue, no one should expect a large bonus.

The real world

Alignment was an issue at A&P when a bankruptcy judge sided with creditors and agreed that top executives needed to present a business plan with appropriate goals for turning around the struggling business in order to be part of an incentive plan. In addition, creditors said any bonuses should be based on improvements in earnings before interest, taxes, depreciation and amortization. At the same time, the judge approved a Key Employee Incentive Plan for 140 other executives worth potential bonuses of 100 percent of their salaries for improvements in margins and same-store sales growth, in order to retain them during the company's difficult period, according to media reports.

Total 2010 Executive Compensation of CEOs at Leading food Retailers
Gregg Steinhafel, Target Corp.
$23,509,194
Michael Duke, Walmart Stores
$18,213,659
Thomas Ryan, CVS Caremark
$15,456,511
Steven Burd, Safeway
$9,904,355
Gregory Wasson, Walgreen
$8,016,608
David Dillon, Kroger
$5,394,715
Peter Lynch, Winn-Dixie Stores
$5,327,812
Howard Levine, Family Dollar Stores
$5,303,006
Richard Dreiling, Dollar General
$5,163,329
Laura Sen, BJ's Wholesale Club
$4,046,318
James Sinegal, Costco Wholesale
$3,529,434
John Standley, Rite Aid
$2,753,085
Terrance Marks, Pantry
$1,524,215
William Crenshaw, Publix Super Markets
$994,005
John Mackey, Whole Foods Market
$46,121
Source: Equilar, Redwood City, Calif. Compensation figures are based on data in company proxy statements. Total compensation includes base salary, cash bonuses, grant-date value of stock and option awards, and benefits and perquisites as calculated by Equilar.

In a 2008 case study examining executive compensation practices at Kroger, Safeway, Costco and Whole Foods published by the Rock Center for Corporate Governance at Stanford University Graduate School of Business, Larcker found that criteria for executive bonuses and the form they took varied among the four retailers. For example, at Costco "no specific formula was used in determining actual bonus amounts," Larcker wrote in the study.

Instead, CEO Jim Sinegal made requests for bonuses based on what he felt was appropriate. In 2006, when same-store sales rose 8 percent from the prior year, Sinegal requested no bonus at all but received a $200,000 bonus, according to the case study.

In contrast, Safeway's board of directors focuses more on increasing the company's stock value when compensating executives than its competitors do. The board set CEO Steven Burd's cash compensation below the median while offering performance-based equity incentives above the median of executive compensation. Burd received a bonus of 170 percent of his base salary of $1.33 million in 2006 when the retailer exceeded targets of same-store sales growth of 3 percent and operating profits of at least $1.55 billion. He also received a capital bonus based on return on invested capital in new store openings and store remodels as well as stock options and restricted stock options based on the company's performance.

Changing Metrics

Increasingly, directors are recognizing that sustainable growth doesn't always show up in quarterly results, Olsen says. And more boards are moving toward deferring executive compensation through stock offerings as a way of preventing short-sighted growth strategies that might backfire in the long run. As a result, some companies are using six-month performance measurement periods instead of annual, Olsen says.

Ensuring that compensation is more aligned with long-term outcomes instead of focused entirely on annual performance metrics could help to prevent short-sighted moves for the sake of pleasing investors. At the same time, Olsen acknowledges, "where it takes us is a greater amount of volatility in executive pay."

Additional reporting contributed by Ann Keeton.