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07/01/2014

The Long and Short of Compensation

Calls for a higher minimum wage for front-line retail workers are becoming commonplace, while executive compensation and tenure is receiving closer scrutiny. And companies are bracing themselves for forthcoming new rules that will require them to disclose the gap between their top executives' compensation and median worker pay.

"More people are paying attention to this topic than there were in the past. The concern is not just that [executive pay] is going up, but that it's going up at a faster rate than the general worker is getting [a pay raise]," says Aaron Boyd, director of governance research at Equilar, a compensation data firm in Redwood City, Calif.

Chief executives during the recession might have been able to keep their jobs and receive bumps in their compensation packages without showing large performance gains. But that is changing.

Target Corp.'s recent firing of CEO Gregg Steinhafel, stemming in part from fallout over the data breach the company made public in December, suggests accountability is taking on new importance. The company reported sales declined 2.5 percent as shoppers thought twice about frequenting the mass merchant following the disclosure of the hacking problem.

Target named Chief Financial Officer John Mulligan interim CEO in May, but experts predict the company, which has hired recruitment firm Korn Ferry to manage the search for a CEO, will land an outsider as it strives to restore confidence.

Ousting the CEO is the ultimate example of merit-based compensation, but corporate boards don't have to go to that extreme to make a statement. About 26 of the CEOs of the largest 100 companies examined received a pay cut in 2013, according to Equilar and The New York Times. Overall, the report found the median 2013 pay for the CEOs was $13.9 million, representing a 9 percent increase from 2012.

"Compensation committees every year review pay. That's their job. They examine it every year, but when events happen, when the company receives negative publicity or [gets] votes against their pay plan, that oftentimes spurs them to make aggressive changes to fix the issues that may exist with their pay plan or to quell shareholder concern," Boyd says.

Walmart has tied executive compensation to the company's commitment to avoid corruption after it received negative publicity and was subject to a government investigation related to accusations of bribing officials in Mexico to expedite store openings. Former CEO Michael Duke announced in November 2013 he would step down, following the Mexico controversy. Doug McMillon, the former head of international operations at Walmart, has succeeded Duke as CEO.

Coca-Cola's executive compensation plan also made the news in late April after Berkshire Hathaway Chairman Warren Buffett, who is a director of the beverage company, abstained from casting a vote in support of the company's proposed increase in stock-option grants to top management, which he called "excessive," according to news reports. The plan had been approved by 83 percent of shareholders, but Buffett's Berkshire-Hathaway is the company's largest investor with a stake of about 9 percent, The Wall Street Journal reported. Buffett reportedly expressed his concern over the plan privately with the company.

Still, few companies have cut CEO pay for the sake of putting it in line with the average increase for all workers. Boyd points out that it's difficult to make a generalization about CEO pay, because it's based on individual performance.

LEAD BY EXAMPLE

Among retailers and CPG companies for which 2013 executive compensation information was available, CVS Caremark CEO Larry Merlo topped the list with total 2013 pay of $22.86 million, followed by Miles White of Abbott Laboratories with $22.5 million, and Coca-Cola CEO Muhtar Kent in third place at $18.18 million, despite a 16 percent decline in his total compensation from $21.6 million a year ago. AbbVie CEO Richard Gonzalez ranked fourth with $18.14 million, followed by Alex Gorsky of Johnson & Johnson with $15.17 million, Equilar says.

In Equilar's top 100 list of highest-paid CEOs in all industries, the cash component of the total pay package rose about 10.8 percent, outpacing the 7.1 percent increase for the equity component. But equity is still a driving factor in total compensation, Boyd says. "So, companies themselves may not be making much of a difference in changing the structure of the pay plan. When the economy is improving and the stock market is growing, it's much easier for executives to see their pay go up overall," he says.

Since the financial crisis, however, compensation committees have been paying more attention to establishing performance metrics to determine bonus pay. "There is so much more focus on pay-for-performance and [whether] CEO compensation [is] linked to performance," says Melissa Burek, partner at Compensation Advisory Partners in New York. "They're really looking for that relationship and rationale."

Increasingly, corporate boards are considering the company's debt as well as its stock performance to prevent executives from engaging in the type of debt-heavy growth that proved damaging to some companies, such as Supervalu. Many boards also are taking a longer-term view of performance to discourage executive decisions that could run up the stock price in the short term but run counter to the company's overall plan.


At the CEO level, the most significant and impactful way [to reward executives] is through the longer-term equity or incentive piece. That's wealth accumulation, that's almost your retirement program of sorts. It's the biggest, it's the most impactful report card on how the company itself is doing."

– Melissa Burek,

Compensation Advisory Partners


"At the CEO level, the most significant and impactful way [to reward executives] is through the longer-term equity or incentive piece. That's wealth accumulation, that's almost your retirement program of sorts. It's the biggest, it's the most impactful report card on how the company itself is doing," Burek says.

By tying executive pay to the company's performance, directors also can more easily satisfy shareholders who are being asked to vote on executive compensation. The Say-on-Pay measure in the Dodd-Frank Act is encouraging board members to scrutinize executive compensation and the underlying metrics more closely, Burek says.

Grocery Retailer and CPG CEO Analysis
COMPANY CHIEF EXECUTIVE SALARY BONUS STOCK AND OPTIONS OTHER PAY* TOTAL 2013 PAY INCREASE (DECREASE) FROM 2012
PepsiCo Indra Nooyi $1,600,000 n/a $7,458,225 $4,133,580 $13,191,805 4.9%
Procter & Gamble Alan Lafley $217,391 $1,632,000 n/a $187,264 $2,036,655 n/a
Safeway Robert Edwards $1,057,842 n/a $4,623,264 $1,089,805 $6,770,911 n/a
Tyson Foods Donald Smith $1,041,231 n/a $4,039,505 $4,136,118 $9,216,854 40.3%
Walgreens Gregory Wasson $1,333,333 n/a $9,560,761 $2,738,647 $13,632,741 13.4%
Walmart Michael Duke $1,366,593 n/a n/a $3,336,833 $4,703,476 (76.5%)
*"Other Pay" includes non-equity incentive plan (NEIP) payouts; n/a = not applicable
Source:Equilar Inc. (www.equilar.com)

Companies already are adding performance-based compensation for lower ranks of workers, and they're looking for new ways to reward employees without breaking the bank. By boosting morale, retailers are likely to face a more satisfied workforce and stave off worker protests such as those Walmart and other large minimum-wage employers have contended with.

The protests also have contributed to new calls for a higher minimum wage. Lawmakers in Illinois are considering a referendum that would ask voters in the November election whether they would favor an increase in the minimum wage to $10 per hour. In Seattle, Mayor Ed Murray has proposed a hike in the minimum wage to $15 an hour within three years for companies with more than 500 workers. Gap's announcement in January that it would increase in June the minimum wage it pays workers in the U.S. to $9 an hour from $7.25 spurred Walmart to say it was exploring the impact of a wage increase as well.

In a February report, "The Effects of a Minimum-Wage Increase on Employment and Family Income," the Congressional Budget Office reported that a higher minimum wage would directly correlate with job losses as companies cut positions in order to afford to pay higher wages. A boost to $9 would result in 100,000 fewer new jobs, while an increase to $10.10 an hour by 2016, as the Obama administration has called for, would cost about 500,000 jobs, the report said. Republicans in the Senate defeated the $10.10 minimum wage bill April 30.

GET CREATIVE

HR experts often recommend trying other forms of recognition to boost morale and retention with less impact to profit margins. Drugstore chain CVS launched Values in Action with San Francisco-based provider Achievers as a way to give ongoing recognition to employees to keep them engaged in the jobs, says Achievers founder Razor Suleman. "Some CEOs think, if I give you a 3 percent raise, this makes you feel like your contributions are valued. We're trying to inspire people to think a little more." Suleman characterizes annual raises as "a sugar rush," because the effect fades quickly. "It's not a very long-term, sustainable strategy," he says.


"Some CEOs think, if I give you a 3 percent raise, this makes you feel like your contributions are valued. We're trying to inspire people to think a little more."

– Razor Suleman,

Achievers


The Values in Action program rewards CVS employees who were recognized by a peer for providing value, great service and going above and beyond. "The CEO was looking at more cost-efficient ways of compensation to actually move the needle to get people to stay and retain longer and live the company values," Suleman says. "He didn't want his managers on a monthly review telling you what you did wrong. He wanted peers catching what you do right."

For example, when Hurricane Sandy wreaked havoc on the East Coast in 2012, CVS employees hand-delivered medicine to the elderly who were housebound. "There was no mandate, no memo saying this is what you should do," Suleman says. "Stores were closed down. People were just like, 'Go home.'" But the CVS employees stayed to help.

The pay-for-performance movement is being felt throughout many retailers, with workers at all levels increasingly receiving extra recognition for a job well done.

As companies are required to state the pay difference between their average workers' wages and top executives' compensation, the conversation is likely to intensify. "People are going to be writing about it and talking about it," Burek says. "It's just difficult to say what that ratio will mean and what, if anything, a company should do about it."