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08/01/2013

Re-evaluating HR Budgets and Bonuses

Slim margins in the grocery retail industry are spurring many companies to re-evaluate their human resource budgets and look for more efficient ways to staff their stores, plants and warehouses. Many retailers are hiring more part-time workers to avoid paying health care benefits.

At the same time, however, signs of a talent war among CPG companies is emerging, creating a significant pay gap between the upper echelon and many employees beneath them.

"What had become a cold war in talent during the recession has heated back up," says Barry Sullivan, partner at Semler Brossy Consulting Group in Los Angeles.

"If there is a lesson from the downturn, the talent war really went cold....Everybody retrenched," Sullivan says. "Now the challenge is, as the recovery solidifies and companies start to get on more solid ground, now the talent war is in full effect."



"Now the challenge is, as the recovery solidifies and companies start to get on more solid ground, now the talent war is in full effect."

–Barry Sullivan,

Semler Brossy Consulting Group


Better-than-average employment packages can help companies recruit and retain workers, while those paying below-market wages might see turnover increase. "We're going to have an interesting play where people who have given up on Walmart will go down the street to another big box store to apply with better benefits," says Kelly Walsh, owner and president of 1 Smart Life in Cary, N.C. "Employees are smart. They know other people who are doing what they're doing [and earning more]."



"We're going to have an interesting play where people who have given up on Walmart will go down the street to another big box store to apply with better benefits."

– Kelly Walsh,

1 Smart Life


At the same time, due to demographic shifts including an aging population and a glut of young adults who haven't been able to find career-track employment, the workforce is also changing, Walsh says. "You're getting people who are part time and want to be full time," Walsh says. "People maybe are taking retail jobs, but that's maybe not where their goal is."

But from the employers' perspective, many are eking out narrow margins that preclude them from hiking wages or offering full benefits despite the slight pickup in the economy. Retailers bogged down with debt or surrounded by low-price competitors are forced to try new labor strategies, such as increased use of part-time and temporary workers to avoid providing health care. They're doing so "to be efficient, to keep expenses in check and to be smart about how they're spending so they can continue to be a profit center," says Walsh, who worked at her family's Tops Friendly Markets store in Buffalo, N.Y. , before pursuing a career in human relations. "The health care issue has everyone scrambling," she says.

Redefining Part-Time with Benefits

Rochester, N.Y.-based Wegmans Food Markets Inc., which has been named to Fortune magazine's annual "100 Best Companies to Work For" list for 15 consecutive years, has earned kudos in the past for offering employer-subsidized health insurance to part-time employees who worked at least 20 hours per week. But the company is changing its policy due to the Affordable Care Act and will require employees to work 30 hours to qualify for the benefits, The Buffalo News reported July 12. At the same time, the company said it would allow its part-time workers to add hours to their work schedules to continue qualifying for health coverage.

Other retailers are taking the opposite approach and restricting the number of hours employees can work. For example, Birmingham, Ala.-based Belle Foods, which filed for Chapter 11 bankruptcy protection in July, had in April announced plans to cut back its staff of full-time employees and replace them with as many as 300 part-time workers to save money. About 34 percent of the company's 2,850 employees work full time, according to a news story on AL.com.

Retailers and CPGs that have been treading water during the recession and the ensuing slow recovery now face a choice in human resources strategies: They can pay below-market wages with hopes of boosting their profit margins or invest in their workforce through higher wages and better benefits. "Are you going to follow the Costco and Trader Joe's model that says you're going to take care of employees to drive down your turnover, or are you going to drive all costs down, including employee pay and employee benefits and really treat these employees as an item" in the budget? asks Shawn Talley, director of human resources at NovaSom in Columbia, Md., who previously was a human resources manager at Home Depot.

While retailers have had little trouble finding entry-level employees for the past five years, some are facing protests over the level of wages and benefits they offer. The Organization United for Respect at Walmart (OUR Walmart) has been campaigning for better wages, hours and benefits for Walmart workers, including picketing some stores. In response, Walmart has filed lawsuits in several states against OUR Walmart and the United Food and Commercial Workers International labor union for what it considers "confrontational and abusive" demonstrations at its stores, an NBC news affiliate reported in June.

At Walmart's recent annual meeting, workers' rights advocates presented several shareholder proposals, which were turned down. One Baton Rouge, La.-based employee said her most recent quarterly bonus was $26.17, while CEO Mike Duke earned more than 1,000 times the average employee, Forbes said. Redwood City, Calif.-based Equilar pegs Duke's 2012 total compensation at $19.98 million, up 14 percent from the prior year.

Yet the controversy hasn't caused Walmart to improve the wages or benefits it offers to its front-line workers. Instead, Walmart has increased its temporary workforce to about 10 percent of its U.S. workforce, compared with 1 percent to 2 percent prior to this year, Reuters reported in June. About 27 of the company's 52 stores surveyed were hiring only temporary workers, while 20 were hiring a mix of full-time, part-time and temps and five said they weren't hiring any workers.

Lobbying for a Living Wage

In Washington, D.C., where Walmart plans to open six new stores, district lawmakers voted in July to approve a measure requiring large retailers to pay employees at least $12.50 per hour. But Walmart said it would refuse to build three of six stores it has planned for the district if the bill becomes law, spurring Mayor Vincent Gray to consider vetoing the measure at press time, The Washington Post reported.

Growing awareness of the living wage issue has made its way to the White House, where the Obama administration is supporting an increase in the federal minimum wage to $9 per hour. The measure has won support from some retailers, including Costco CEO and President Craig Jelinek. Costco pays a starting hourly wage of $11.50 per hour and provides more comprehensive benefits than many of its competitors. "We've always been a pro-employee company," Costco vice president Bob Nelson told Retail Leader. "We've always had this culture around here to have industry-leading wages and benefit packages, including for our part-time employees."

The company's turnover rate is in the "very low teens" and drops to about 5 percent to 6 percent for workers who have been employed for more than a year, Nelson said. "We think it's important in our business to get the highest-quality worker you can. You do that by offering better than a fair wage and an incredible benefit package," which includes health insurance, a 401(k) plan and a culture that's based on an open-door policy. "Anybody can talk to anybody about any issue. You don't have to go through your supervisor or your direct report," Nelson says.

Employee-owned Wawa, which has 595 locations in the Mid-Atlantic and Florida, also advertises better-than-average benefits, including stock ownership, a 401(k) plan, medical, prescription, dental and vision coverage, wellness reimbursement and an educational assistance plan. The company offers continuing education classes, which are designed to lead to career advancement, at its Wawa University. According to a job ad from the retailer, it promoted 22 percent of its 17,000 employees last year.

Companies often set compensation according to industry benchmarks and their own strategies that determine whether they want to pay at market rate, or above or below the market average, Sullivan says. At CPG companies, certain positions, such as digital marketers, are receiving inducement awards because they're in such demand, he says.

Happy Workers, Happy Customers

But compensation alone is no guarantee of worker satisfaction. Employees want to be engaged in the work they do. They want to enjoy where they work and feel they have a voice in the organization, Walsh says. Many also want a career path to advancement. "It kind of gets down to...who's going to get the people who are most loyal and engaged and want to stay there for a long time," Walsh says. What's more, happier workers lead to more satisfied customers. "If you're treating your employees better, your employees are going to be treated better," she says.

Satisfied workers are more likely to stay with the company. Turnover is costly in terms of time, money and lost experience, says Halley Bock, president and CEO of Fierce Inc., a Seattle-based leadership development firm. "The institutional knowledge that leaves the building with that individual, and the relationship that leaves with that individual, that is a tremendous expense for a company," she says.



"The institutional knowledge that leaves the building with that individual, and the relationship that leaves with that individual, that is a tremendous expense for a company."

– Halley Bock,

Fierce Inc.


"In the grocery context, what's the difference between Pink Lady and Honeycrisp apples? The kid who has been there for 15 minutes has no idea. The person who has been there for six months, 18 months, two years will tell you the difference," Talley says.

To counter the trend, human resources experts recommend moving some employees to a performance-based system. The focus then becomes, "How are you meeting your objectives, with less emphasis on counting your hours," Walsh says. The system also provides store managers with input into the objectives, and most appreciate being invited into the process.

Sweetening the Exit

Despite the say-on-pay provision contained in the Dodd-Frank Act, executive compensation at the nation's largest companies continues to soar.

According to Equilar Inc., the top 200 chief executives of public companies with at least $1 billion in revenue saw their median pay jump 16 percent to $15.1 million in 2012. Some retail CEOs exceeded that average, including CVS Caremark CEO Larry Merlo, who received $18.1 million. Across the S&P 500, median total compensation for CEOs rose 6.5 percent to $9.7 million in 2012, says Aaron Boyd, director of governance research at Equilar.

But some retailers deliberately kept their executive compensation under the average, including Costco Wholesale Club, where CEO W. Craig Jelinek received $4.8 million in 2012. His compensation was so far under par that McDonald's, which has paid an average of $13.4 million annually to its top executive, decided to stop using it as a comparable for its executive compensation packages, Huffington Post reported.

But annual wages aren't the end of the story for top executives. Most CEOs of major publicly traded companies receive some cash payment if they lose their job when a company is sold or new officers clean house. Exit packages for top executives serve to address uncertainty in an economic climate that has encouraged consolidation. "Savvy executives will definitely negotiate on the front end a back-end arrangement. It will allow them to take on a role of greater risks," says Barry Sullivan, partner at Semler Brossy Consulting Group in Los Angeles.

With the economy picking up, corporate boards are becoming more demanding of executives, resulting in more turnover. "Now take the broader economy aside, we have a more clear sense today whether we are outperforming competitors or underperforming [competitors]. Whenever there is clarity around that, you can expect to see pay-for-performance and executive turnover," Sullivan says.

CEO Walk-Away Packages of $100 million-plus
Source: GMI, "Twenty-One U.S. CEOs with Golden Parachutes of More Than $100 Million"

Sullivan says the say-on-pay movement has helped to reduce the number of large golden parachute windfalls common during the 1990s, but others say reform hasn't come fast enough. "Too many golden parachutes and too many retirement packages are of a size that clearly seems only in the interest of the departing executive," wrote Paul Hodgson, senior research associate, and Greg Ruel, research associate, at GMI Ratings in a 2012 report on golden parachutes.

Since 2000, 21 CEOs received walk-away packages valued at more than $100 million, GMI Ratings says. Thomas Ryan, who was CEO of CVS Caremark Corp. from 1998 to 2011 received $185.4 million upon his departure. James Kilts, who served as CEO of Gillette Co. from 2001 to 2005, received an exit package worth $164.5 million. And Robert Ulrich, Target Corp.'s CEO from 1994 to 2008, received about $164.2 million when he left.

At Supervalu, Wayne Sales, the company's former nonexecutive chairman who stepped into the role of CEO as it examined strategic options, including a sale of the company earlier this year, turned down a portion of the $12.8 million exit package the board of directors had granted him. Instead, the Minneapolis-St. Paul StarTribune reported, he approached the board with a request to reduce the package and ended up with $10.1 million after agreeing to forgo a bonus payment of more than $2 million.
– Ann Meyer

Ann Meyer, who is president of media services firm L3C Chicago, serves as senior editor of Retail Leader magazine.