Who Gets a Say on Pay?

Food retail executives are being held accountable for million-dollar pay packages. Shareholders and lawmakers have ushered in compensation tied to performance.

Two components of the Dodd–Frank Wall Street Reform and Consumer Protection Act affect c-suite compensation. Shareholder meetings often include advisory "Say on Pay" votes on executive pay.

The mandate now extends to small and large public companies, and consultants say they're changing how corporate boards structure their pay packages. The outside directors on compensation committees have gone beyond the law to base bonuses and other incentives on corporate performance.

Most performance goals are long-term, says Melissa Burek, partner in New York City-based Compensation Advisory Partners. That makes the shift toward performance the c-suite's biggest pay change.

The pressure will stay on past this spring. Fiscal 2015 disclosures will include total compensation for both the chief executive and his or her median-level employees. In 2016, proxy forms must state the ratio of CEO compensation to median pay.

THREE INGREDIENTS

Most executive compensation packages break down into three components: base pay reviewed annually, a yearly bonus and a three- to five-year incentive plan. Perquisites like country club memberships and personal travel on corporate jets may also be part of the package, but Burek says they're waning.

"First, you see an uptick in long-term incentive, then the many vehicles companies use, such as stock options or restricted stock or what we call performance-based equity or cash," Burek says. "And that means a longer-term view.

"These longer-term incentives are typically three-year programs linked to some performance metric," Burek says. "And you see a significant increase in the use of them and emphasis on them."

Companies are shifting more of their executive pay toward awards that vary with corporate results.

At top grocer Kroger, salary chips in less than a fifth of chairman and former CEO David Dillon's total pay. Stock, options and incentive bonuses for 2013 all were higher than the previous year, according to the company's 2014 proxy statement.

Kroger replaced half of its time-based restricted stock awards with performance units. In 2017, executives will earn shares based on hitting three years of strategic plan targets, cutting costs, engaging workers and raising return on invested capital.

"A few years ago you'd see more stock options," says Burek, "and now what you see is at least 50 percent, if not more in some companies, using the performance-based plans–which is a good thing. It's linked to performance, and that's what shareholders like to see."

After a $500,000 signing bonus, Super-valu will target half of CEO Sam Duncan's pay to long-term incentives. The Fresh Market shifted its long-term incentives to shares, with fewer stock options.

The pay shift puts less money into the annual bonus. "Typically the short-term bonus for executives is about 20 or 30 percent of the total compensation pie," says Burek. "If you're talking about a CEO it's more like 20 percent. You wouldn't want that to be about 50 percent of your pay program. You want the CEO and the c-suite executives focusing more on the longer term."

Kroger pegs bonuses to EBITDA, same-store sales and targets for fuel center and strategic growth. Safeway has both operating bonuses (based on same-store sales and net income) and capital bonuses (judged by internal return).

Executives often are required to hold shares in their company. The Fresh Market CEO Craig Carlock must own stock worth at least six times his base pay, with no hedging or pledging of shares. At Kroger, Supervalu and Safeway, the CEO must hold five times base salary.

METRICS SYSTEM

Companies face a challenge in properly using metrics to measure performance, says Aaron Boyd, director of governance research at Equilar Inc. in Redwood City, Calif.

"If the stock price is going down but they're saying that expenses or cash flow or revenue is a key measure of success, then [CEOs are] going to get their payout," Boyd says, "For the short-term awards often they'll focus on other things, maybe it's opening new stores or controlling costs."

The Fresh Market trimmed executive bonuses when it missed fiscal 2013 targets for sales, operating income and return on invested capital. For executive officers, incentive payouts were less than 15 percent of each exec's target bonus.

"Another thing that companies will do is use relative measures," Boyd says. "They'll say, we understand that the stock price may go down but if compared to everybody else we're in the top quartile, or everybody's going down but we only went down a little bit and actually gained market share.

"A lot of companies are using this relative measurement to determine their awards because, again, that says how you're doing among your peers.

"It also works on the other side," Boyd says. "If the economy's booming and everybody's stock price is going through the roof, the individual could be doing a very bad job, and the stock price is still going up, a package is designed to ensure that person is not rewarded for performance that really isn't attributed to what they're doing."

PEER PRESSURE

Corporate boards also try to keep pay in line by comparing them with other companies, using data from proxy filings or consultants' surveys.

"The majority of them simply hire a consultant and will benchmark their pay," Boyd says. "They'll look at the CEO's pay and decide what they think is appropriate. The consulting company will provide data to see if the numbers are there. They'll look at the amounts and see if they are aligned with the interest and culture of the company."

Comparisons can be tricky, though, since retail payouts can vary widely. Pay averages $3.7 million among food stores in the Russell 3000, according to Salary.com, while food producers and general merchandise retailers average upwards of $6 million. (The Russell 3000 is a list of the top 3,000 U.S. companies compiled by Russell Investments.)

Kroger, with advice from the Mercer consulting firm, measures its pay package against those of eight companies in grocery (Safeway, Supervalu), pharmacy (CVS, Rite Aid, Walgreens) or consumer packaged goods (Costco, Target, Walmart).

"The typical motivators are to retain and motivate and incentivize executives to perform," Boyd says. "How you do that is really up to the compensation committee, but most hire a compensation consultant. They'll look at a lot of information and a lot of them will use their own internal measures of how their pay compares to other employees."

Publix tracks salary against only supermarket operators, making allowances for its smaller footprint. CEO William Crenshaw makes $1.14 million; its 2014 proxy statement claims that's 62 percent less than the average in his peer group, yet Publix's financial results are "generally superior" to its peers.

After selling its Albertsons portfolio in 2013, Supervalu picked 19 peers more closely matching its slimmer, more wholesale-oriented profile–not only Publix, Rite Aid, Safeway and Whole Foods, but also wholesale grocers (Nash-Finch, Sysco), other specialty distributors (Core-Mark, Tech Data, WESCO), general and specialty retailers (Kohl's, Grainger, Toys "R" Us, Sears) and retail technology (Core-Mark, SYNNEX). Consulting firm Exequity evaluated their compensation, drawing on Towers Watson resale-wholesale databases.

SAY ON PAY

Dodd-Frank has required shareholder votes on executive compensation once every three years since 2011 for big public companies, so many of last year's proxy cards included the compensation question. The mandate spread to smaller companies in 2013.

Shareholders can elect to take more frequent compensation votes. Whole Foods Market and The Fresh Market have set annual proxy votes since 2011. Corporate boards also may bring new pay packages to shareholders after a merger or restructuring

Say on Pay has given investor groups more leverage in demanding compensation changes. "I'm not so sure it's directly impacted pay levels," Burek says, "but what it has impacted is what we call the more egregious pay packages.

"You have larger institutions voting and you have advisory firms helping shareholders to cast their vote on Say on Pay, and they're focusing on some of these extra elements of pay that are not performance related," she says. "That Say on Pay vote may not be binding, but investors and advisory groups can be pretty vocal about what they like and don't like."

Also, companies that trade shares on the New York Stock Exchange and NASDAQ must draw compensation committees from independent directors. "So you're not having the CEO or an insider–someone working for the company who essentially has a conflict of interest from a management perspective–setting pay for the CEO," Boyd says.

The corporate culture also impacts the c-suite compensation package.

"Some companies' culture is a little bit more aggressive–some are very much linked to performance," Burek says. "What performance metrics do you use? Do you link to stock price? Do you link to total shareholder return (TSR) or do you link to revenue and earnings per share (EPS) growth?"

MULTIPLE DELAYS

A yet-to-be felt Frank-Dodd provision could affect future CEO pay. It requires public companies to calculate its CEO's compensation compared with the median total compensation of all other workers.

"I would say, to date, it has not been one of the strongest drivers for setting pay levels," says Burek. "Companies tend to look more at competitive practices. And whether it's for an accountant or a controller or a CEO, they'll look to the market norms."

The U.S. Securities and Exchange Commission has delayed publishing a final rule on how to calculate and present a ratio that covers wages and benefits. Multinational companies are struggling with how the rule will account for foreign employees, and the public will have to make allowances for pay differences across industries.

Burek contends the rule will set an upper limit on CEO base pay as a multiple of the median value.

"Once the rule becomes final–and it'll probably be the end of 2015 at the earliest–there will be more noise and more focus on this pay relationship," she says. "And when you start to get that focus it probably will impact pay levels in the future or how companies will pay–in salary or incentives or other pay elements. You will see more disclosure and supplemental explanation around this topic, probably within a year or two."

Fewer perks like country club memberships and financial planning augment c-suite pay. Safeway's new CEO Robert Edwards continues to use corporate jets for personal travel, but not the paid car commute or home security Steven Burd enjoyed.

Burek believes companies are doing away with those extras because they aren't tied to performance.

"Some of those things are on the periphery of the comp program," she says. "Perquisites overall have really come down in terms of their use and their prevalence, and even their value. If they are getting perquisites they tend to get financial planning, maybe an executive physical and typically air travel for security reasons.

"But again even that's kind of a comedown. The executive makes enough money they could pay for those on their own."

Brenda Russell is a Chicago-based freelance writer who has written for Crain's Chicago Business, the Chicago Tribune, el Restaurante Mexicano and Specialty Coffee Retailer.