RETAIL EXECS TAKE PAY CUTS
Byline: David Lipke / With contributions from Evan Clark
NEW YORK — There’s probably no need to start passing a hat but, along with corporate earnings, compensation in the corner offices of major retailers took a hit last year, as chief executive officers from James Zimmerman at Federated Department Stores to Raphael Benaroya at United Retail saw their pay take double-digit dives in 2000.
Excluding those companies which switched skippers between 1999 and 2000, ceo pay at 40 top retailers dropped an average of 25.7 percent last year, as a stalling economy and diminished corporate earnings led to vanishing performance-related bonuses. (See chart on page 19.) Using this base of top executives, average ceo pay fell from $2.6 million in 1999 to $1.9 million in 2000.
“The drop in compensation doesn’t surprise me, as business took a turn for the worse in retail, after some high-flying years,” noted Eric Kenzer, president and chief operating officer of executive search firm Kenzer Corp., which specializes in the retail sector. “A lot of the falloff is related to missed performance targets. If you look at base salaries, those are stable or even up. But it is more and more common to link total ceo compensation to corporate earnings through bonuses, stock grants and options.”
In fact, again excluding those companies that changed ceo’s, average earnings dropped 25.1 percent last year at retailers surveyed by WWD, nearly matching the 25.7 percent drop in average ceo compensation.
The weakening earnings performance of these retailers in 2000 contrasts sharply to the healthy results enjoyed in the prior year, when income was up an average of 31.9 percent at companies included in the compensation survey. This year, 19 companies, or nearly half, saw their bottom lines retreat and 8 plunged into the red. In last year’s survey, no retailers failed to turn a profit.
Of course, the softening retail climate didn’t put a damper on all compensation committee largesse, and some chieftains were crying all the way to the bank — notably the newly installed leaders of J.C. Penney Co., Kmart and Wal-Mart, who finished win, place and show, respectively, in the 2000 compensation derby.
At Penney’s, new ceo Allen Questrom, a veteran of the top jobs at Federated and Barneys New York, raked in a cool $16.5 million — as reported in the company’s proxy statement — in salary, bonus and, most importantly, a 1,000,000-share restricted stock award, which vests in annual 20 percent increments beginning in September of this year. The award was worth $14.6 million last September, the date of the grant, but has ballooned to a current value of around $24 million, as investors have pumped up Penney’s stock on expectations of the company’s revival. Factoring in this price escalation, Questrom’s pay package topped $26 million — even outpacing the ballyhooed annual payout of another neo-Texan, baseball’s Alex Rodriguez. Keep in mind this is for less than four months of employment, as Questrom joined Penney’s in September 2000.
New Kmart ceo Charles Conaway, fresh from CVS, didn’t quite reach Questrom’s big-league figure in his first four months at the discount giant, but he still managed to gross a tidy $14.2 million. The bulk of that was an $8.1 million bonus, encompassing signing bonuses and an annual bonus, in both cash and stock. In addition, Conaway received a restricted stock award of 615,000 shares, worth $4.7 million at the time of the grant, but now valued at $6.7 million when pegged to last Friday’s stock price.
Both Questrom and Conaway were recruited from outside their respective companies, and their wooing price was head-and-shoulders above what new ceo’s who were promoted from within, such as H. Lee Scott of Wal-Mart and Alan Lacy of Sears, Roebuck & Co., earned in their new positions. Scott pulled down $8.9 million last year, while Lacy scored $1.7 million, not exactly chump change, but significantly smaller than the Questrom-Conaway haul.
“This is nothing new; outside executives usually cost more than internal promotions,” said Joseph Carideo, a partner in the retail practice at Battalia Winston, the headhunters who placed Gene Kahn as ceo at The May Department Stores Co. “When you promote from within, you don’t have to woo or cajole someone, or compete with other entities. With an internal promotion, you have a captive audience, so you don’t have to be as generous.”
Ted Jarvis, a compensation expert at human resources consultancy Towers Perrin, observed that a large portion of Questrom’s and Conaway’s compensation came in the currency of stock awards. “It makes sense for Penney’s and Kmart to link each executive’s economic fortunes to the company and the company’s shareholders,” he said. Scott also received a large chunk of his pay in Wal-Mart shares, with a $6.1 million restricted stock award.
The sizable paydays at Penney’s and Kmart could appear paradoxical to a casual observer, as these were the two retailers with the steepest losses last year, at $409 million and $244 million, respectively. However, as Melanie Kusin, managing partner of the global consumer practice at executive search firm Heidrick & Struggles, points out: “Kmart and Penney had the most to lose and the most to gain, so they had to pay more to get the right talent. These are two huge retailers with their futures at stake and they went after high-caliber, top-dollar candidates.”
The two retailers’ investments in new chieftains appear to be paying off, as each has implemented ambitious turnaround strategies that have been enthusiastically endorsed on Wall Street.
For those retailers looking for new leadership to produce bottom-line results, top-level compensation packages were deemed vital to attracting the necessary talent. “Demand for top-level ceo’s in the retail industry far outweighs supply,” said Arnold Aronson, managing director of retail strategies at Kurt Salmon Associates, a consulting firm. “Retail is a hugely difficult field; you are always in the eye of the economic storm. To be a successful ceo, you have to have the instincts of a merchandiser, and understand the science of technology, and then everything else in between.”
Most of the remaining top-10 money-makers last year made do with less, as the companies they steer hit some financial potholes. At Gap, earnings retreated 22.1 percent, and ceo Millard Drexler, a longtime fixture on this list, saw his pay package shrink 27.2 percent to $5.7 million, including a $2.4 million pruning of his annual bonus. Ames Department Stores handed over $3.3 million to Joseph Ettore, 58 percent less cash and stock than the previous year, as the discounter’s bottom line sunk deep into the red. Department-store giant Federated went from earning $795 million in 1999 to losing $184 million in 2000, and ceo Zimmerman’s pay took a 66.7 percent hit, down to $3 million. At Ann Taylor, the bottom line dropped 18.9 percent and ceo J. Patrick Spainhour made $2.7 million, down 9.1 percent from the previous year.
Two top earners who managed to buck the trend and increase compensation were George Kolber at American Eagle Outfitters and Burton Tansky at Neiman Marcus. Both ceo’s led their respective companies to earnings growth during the year. Kolber raked in $4.1 million, up 121.1 percent, on a 3.4 percent earnings bump, while Tansky made $2.9 million, up 107.1 percent, on a 41.3 percent earnings increase.
Oddly enough, Target’s Robert Ulrich, who led the 1999 rankings, suffered a 55.1 percent setback in compensation, to $4.4 million, despite a 10.5 percent increase in the retailer’s earnings. In the prior year, Ulrich benefited from a $4.8 million longterm incentive plan payout that significantly enlarged his compensation package.
Compensation figures provided here do not include stock options granted in 2000, or income realized from the exercise of options awarded in previous years. Many ceo’s boosted their actual income through these measures, including Ulrich, who received 750,000 options last year, hypothetically worth somewhere between $16 million and $40.6 million, according to company estimates and dependent on Target’s future stock price. Additionally, Ulrich exercised 100,320 options last year, realizing $2.2 million in cash.
Gap’s Drexler was another ceo awarded a highly profitable potential windfall of 1.5 million options last year, with a company-estimated value of $33.6 million on their grant date. Drexler additionally reaped an actual $10 million through the exercise of existing options in 2000.
The Limited’s ceo Leslie Wexner’s total compensation dropped 68.2 percent, to $2.3 million, on a 7.1 percent decline in company earnings. Wexner’s bonus payment plummeted 81.1 percent, to $628,992, and he received no restricted stock award, against a $2.4 million award in the prior year. Wexner did not act on any exercisable options during the year.
Sears ceo Alan Lacy, in addition to the compensation figure discussed earlier, was awarded 603,750 options last year, estimated by the company to be worth $6.4 million on their grant date. Lacy did not exercise any exercisable options during the year.
Saks Fifth Avenue ceo R. Brad Martin was the biggest compensation gainer of the year on a percentage basis, with his package totaling $2.6 million, up 139.1 percent from the previous year despite a 60.3 percent slide in company profits. Additionally, Martin received 1.9 million options, hypothetically valued between $12.2 million and $26.1 million by the company, depending on future stock price appreciation. Martin did not exercise any exercisable options during the year.
In addition to the compensation figure previously discussed, Neiman’s ceo Tansky received 140,000 options valued between $2 million and $5.2 million. Tansky did not move on any exercisable options during the year.
May Co. forked over $2.1 million in compensation to its ceo Kahn, 15.3 percent less than the previous year, including a 60.3 percent drop in bonus payments, on a 7.4 percent decline in company profits. Kahn further gained 127,500 options, worth $1.2 million on the grant date. Kahn did not exercise any exercisable options during the year.
In total, 18 ceo’s saw their compensation levels diminish last year, while 15 enjoyed pay increases. Despite the evident backsliding among many retail leaders, on the whole, these 40 companies paid 2.5 percent more to their ceo’s in 2000 than they paid out in 1999, with a big boost provided by the new ceo’s enviably large pay packages. Including the seven new ceo’s who arrived last year, the average retail ceo in this survey earned $2.7 million, up from $2.6 million in 1999.
However, Towers’ Perrin’s Ted Jarvis noted that overall ceo pay in the retail sector is very much in line with other nonmanufacturing industries, with the exception of the outsize ceo paychecks in the finance area. In fact, according to a 2000-2001 survey carried out by consulting firm Watson Wyatt, retail ceo compensation lagged these industries by a slight 2-3 percent when compared on a compensation-to-sales basis.
Also apparent from this survey is the large number of new ceo’s who cropped up last year, with seven companies transitioning to new heads in 2000, compared to none in 1999. “This turnover has a lot to do with the weak retail performance last year,” said Robert Kerson, president of the global retail practice at recruiters Korn/Ferry. “Directors and shareholders are increasingly less patient with poor performance, and ceo’s are easy targets when things don’t go well.”
Kerson added that retailers traditionally have been lackadaisical in recruiting college graduates for entry-level management positions, meaning there is a void in the pipeline for future ceo’s — meaning ever higher paychecks for those few who make it to the top.