REWARDS MOUNT FOR RETAIL CHIEFS
Byline: Thomas Cunningham
NEW YORK — Top retail executives were well rewarded in 1998 and will likely be even more so after the final tallies are made for 1999, as the competition to lure and retain corporate chiefs leads to rich pay packages heavily weighted with stock awards.
“We have seen executive compensation moving at a fairly good clip over the last couple of years and the reason it’s increasing is there is tremendous competition out there,” said Dallas-based Craig Rowley, vice president of the national retail practice at The Hay Group, a management consulting firm.
“It’s a really tough retail environment, and for executives, that can make a difference in what companies are willing to pay.”
Melanie Kusin, managing partner of the consumer practice at executive search firm Heidrick & Struggles, agrees: “If you’ve got somebody good, you’d better take care of them. You have to be competitive to keep the best competitors.”
The stock market’s continued climb helped to enrich many retail honchos in 1998 as they benefited from generous awards of restricted stock and cashed in piles of stock options.
A WWD survey of compensation for 40 retail executives showed that the average annual compensation increased 37.8 percent to $3.8 million, outstripping a 32 percent growth in earnings. Of the 40, only 12 received less compensation in 1998. (See chart, page 36.)
Gap’s Millard S. Drexler topped the charts, earning $12.6 million against $3.7 million in 1997, a 237.6 percent pay hike. Drexler’s bonus surged to $5.3 million from $2 million as Gap’s earnings catapulted 54.4 percent. He also realized $4.8 million from exercising stock options. His base salary rose to $2 million from $1.9 million, and other compensation, primarily amounts going to his retirement plan, rose to $492,896 from $244,712.
Robert J. Ulrich at Dayton Hudson took home a total of $11.9 million, with almost half of that amount coming from the exercise of options. Wal-Mart’s chief executive, David D. Glass, earned over $10 million, with his pay boosted by restricted shares worth $3 million. And R. Brad Martin, chairman and chief executive of Saks, got a 160.6 percent raise to $9.8 million, as he received $3.2 million in restricted stock and realized $4.2 million on the exercise of options.
Part of the reason for the boom in paychecks is that retailing has special requirements that make it hard for companies to retain executives, according to Rowley.
“Ceo’s and executives in retail work incredibly hard. They work 365 days a year, 15 hours a day. It’s the only industry that measures sales on an hourly basis,” he said.
Another reason is that executives have become more savvy about their opportunities, according to Kusin.
“People are getting a lot smarter about what they ought to be getting,” she said. “They won’t compromise on the stock side anymore.”
The move toward the granting of options on restricted stock in compensation also better links the performance of executives with the interests of the shareholders, according to Kusin.
Unlike cash bonuses, which tend to focus on yearly performance targets, equity-linked pay packages — especially ones that vest over a period of years — encourage executives to manage for the long term, she said.
Among other’s benefiting from stock awards were United Retail’s Raphael Benaroya, whose pay package more than quintupled to $5.9 million as he exercised options worth almost $4.6 million. Ross Stores’ Michael Balmuth had $6 million of his $8.3 million compensation come in the form of a restricted stock grant. Heywood Wilansky, at Bon-Ton, received a $3.7 million restricted stock award, representing over two-thirds of his total pay.
Restricted stock is usually awarded if the executive leads the company to achieve certain financial goals. When earned, the shares vest over a predetermined period — as long as the executive stays with the company.
Options give the executive the ability to buy shares at a fixed price, generally a value that is close to the stock price when the options are issued. The further a stock rises, the more the options are worth.
Others benefiting from stock-based compensation included Pacific Sunwear’s Greg H. Weaver, who realized $4 million by exercising options, hiking his compensation to $5.1 million from $913,033.
Dress Barn’s Elliot Jaffe realized $2.1 million through exercising stock options, lifting his overall pay to $3.2 million from $905,166.
Talbots’ Arnold B. Zetcher’s compensation surged 155.7 percent to $2.4 million, reflecting a hike in his bonus to $814,800 from $195,600 and an $873,348 award of restricted stock. At Ann Taylor, J. Patrick Spainhour’s compensation rose 181.1 percent to $2.1 million, reflecting a hike in bonus to $942,500 from $81,250 and $412,500 from exercising stock options.
Nordstrom’s John Whitacre’s pay surged 323.3 percent to $2.6 million, as his bonus jumped to $805,000 from $245,791. Whitacre also received restricted stock worth $562,513 and cashed in options worth $727,797.
Joseph Ettore, Ames president and chief executive, benefited from a new employment contract. Ames paid Ettore $2.7 million cash after he surrendered rights to 300,000 options as part of the June agreement. The payment helped increase his 1998 package over 400 percent to $6.8 million.
While equity-intensive compensation packages obviously pay off during bull markets, they become less attractive when the market starts to turn bearish.
For example, if the market slumps, an executive’s options can end up being worthless because the exercise price is “underwater,” or lower than the current market price, Kusin said. For that reason, executives view restricted stock awards as more tangible than options because even if a company’s stock price slumps, the restricted shares still can be sold for cash, she said.
Hay’s Rowley said that sometimes when the stock price falls significantly, a company can reprice the options to a lower level in order to keep executives motivated to stay with the company, although in many cases a repricing is frowned upon by shareholders. In fact, executive compensation packages in general are receiving closer scrutiny from shareholders and the Securities and Exchange Commission, Rowley noted.
“It behooves the organization to be able to answer the question ‘what value are we delivering?’ and be able to measure that.”
However, Rowley said that despite this scrutiny, many complaints about large executive paychecks are misguided because investors need to recognize the shareholder value created by a exceptional leader.
“Given the choice of investing in a high-performing company where the executives get a lot of money and a low-performing company where the executives have low pay, I’ll take the higher performing company,” he said.
Promotions can bring big hikes in pay as well. At May Department Stores Co., Eugene S. Kahn, who moved up from executive vice chairman to president and ceo in May 1998, saw his compensation last year soar to $7.8 million from $1.7 million in 1997. A main component in last year’s package was $5.3 million in restricted stock awards.
Although some corporate heads took home less this year than last year, most often that was because the year-earlier comparisons were skewed by large one-time awards.
For example, Michael S. Jeffries, chairman and chief executive at Abercrombie & Fitch, saw his total pay fall 33.1 percent to $6.7 million, despite a report from the company’s compensation committee that called the company’s performance over the last five years “exceptional.” However, the main reason for the drop was that Jeffries’s restricted stock award fell to $3.7 million from $8 million in 1997.
Despite the lower paycheck, Jeffries benefited handsomely from the stellar performance of A&F’s stock. He holds 619,334 shares of restricted stock worth $24.7 million at Friday’s close of 39 7/8, as well as exercisable and unexercisable options with a combined value of $98.6 million at the end of January, according to A&F’s proxy statement.
TJX’s Bernard Cammarata’s compensation fell to $4.9 million from $16.7 million, but the year-ago period included $13.4 million in cash and stock awards. His bonus in 1999 rose to $2.2 million from $1.1 million.
Compensation for Floyd Hall, chairman and chief executive of K-Mart, fell 20.2 percent to $5 million from $6.2 million, even though K-Mart’s proxy cited his “exceptional achievement” with respect to his individual financial and personal performance objectives. The company cut Hall’s bonus by over $400,000 to $1.4 million and gave him restricted stock worth $1.6 million — over $1 million less than he was awarded last year.
On the plus side, K-Mart showered Hall with options, giving him enough to buy a total of 1.3 million K-Mart shares. That compares with a one million-share option package a year earlier. Hall holds exercisable and unexercisable options worth $22.7 million, according to the proxy.
At J.C. Penney, James E. Oesterreicher, chairman and ceo, took a 17.6 percent cut to $1.8 million, though the company’s earnings — lifted by special items — improved 4.9 percent.
In 1998, Oesterreicher’s bonus was slashed over 40 percent to $449,886 and he received no payout from the company’s long-term incentive performance plan. Penney’s compensation committee said the decreases were a result of the company’s weaker performance in 1998 vs. 1997.
Roger Farah, who gave up his position as ceo of Venator Aug. 16, also lost a bonus, but his overall pay jumped 44 percent to $3.2 million in 1998. Farah was paid a total of $1.7 million in cash and shares under a long-term-incentive compensation plan.
Although he has stepped down from day-to-day operations, Farah retains his position as chairman at Venator.
Others who were denied a bonus because their firms performed below expectations were Carl Tooker at Stage Stores and Stein Mart’s Jay Stein. At Gadzooks, Gerald Szczepanski missed out on a bonus for the second straight year.