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Dollar General CEO sells shares, investors worry

April 9, 2014

One of the typical perks of being a top executive at a publicly traded company is that shares of the company stock are part of the deal. In fact, it's the wealth inherent in the stock that allows a few top CEOs to take very little in the way of salary from the companies they run. On the downside, as a recent article on The Motley Fool website points out, investors can find it "nerve-racking" when a top executive sells shares in companies in which they are invested. One recent example involved Rick Dreiling, CEO of Dollar General.

Mr. Dreiling recently sold the majority of his shares in the chain for a sum of nearly $19 million. While the article pointed out that Dollar General has achieved same-store sales increases over the past six years, it also listed a variety of factors that could mean more difficult going for the chain in the future. In the end, the article failed to draw any conclusion as to what Mr. Dreiling's sale would mean for the company.

Controversies, real or imagined, over CEOs selling shares are certainly nothing new. Back in 2003, Steve Burd, the former chairman, president and chief executive officer of Safeway, exercised options to sell around 200,000 shares of the company's stock he held. Mr. Burd made a tidy profit on the deal, which was both financially smart and his right, but he received criticism for achieving this windfall when the company was struggling, labor problems were a recurring theme and shareholders were grumbling over their returns from Safeway stock.

FINANCIALS:     [NYSE:DG] [ ]

Discussion Questions:

What is your view on the use of shares as executive compensation? What kind of signal does it send to investors and stakeholders when a CEO of a retail company has sold a large block of stock?

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Instant Poll:

What kind of signal does it send to investors and stakeholders when a CEO of a retail company has sold a large block of stock?

Comments:

The use of stock as part of a CEO compensation package is meant to align their interest with that of the stockholders. It also typically means that a large to very large portion of the CEO's wealth is in one stock. We have all learned the hard way that is not a good idea.

It all works well until the CEO's advisors tell him that they should diversify their portfolio for tax, inheritance, etc. purposes. The only way that can do so is to sell some of stock they hold in the company. Typically, when a CEO does do a sale of significant size, there is a press release that indicates that is was one for one of those or other reasons. These announcements are meant to allay any concerns investors might have.

I still believe stock is a good way to align management objectives with those of shareholders. The concern for me comes when the short-term value of the stock becomes the underlying reason for making business decisions.

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Steve Montgomery, President, b2b Solutions, LLC

I agree that executive compensation should include stock. It is one way that stockholders have to incent an executive to increase the value of the stock by improving the company returns. The same holds true for the board of directors. It is also good for the stockholder to see when the executives sell their shares as a indication to sell or keep their own shares. There are a lot of reasons for executives to sell their shares so a stockholder needs to do their homework to see if the sale by an executive is an indication of bad results or just a move to earn more money for the purchase of a new home, etc.

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Frank Riso, Principal, Frank Riso Associates, LLC

Dreiling's stock sale may signal his departure in the next 12 - 18 months. If he is planning to leave his role, he may not want to sell when someone else is running the company. In that scenario, he might feel that the health of the business would be less certain, than it is today, while it is under his control.

I don't think it necessarily signals problems within the walls of their company.

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Liz Crawford, VP, Strategy & Insights, Match Drive

It is certainly his right to sell and gain as much as he can. He was given the stock as an incentive to grow the business. He did that. This is his payoff. I am not concerned as much with him selling stock when he is the leader as I would be if he sold under his successor's term.

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Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

The real signal is sent when quite a few of top top managers are selling their shares.

'Roadster'

Selling a large block of shares is not a problem. Selling the majority of shares does raise a flag.

That being said, I believe the largest part of executive compensation should be in stock. It aligns the objectives of the leadership with that of the stockholders. I believe so much in equity incentives that I think even interns should be awarded stock in a company. And I do, and I have.

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Gene Detroyer, Professor, Independent

Selling of stocks is just a variable in the whole picture, a string in the rope. Before any nerves are frayed, all variables must be examined before interpretation. I would consider the initiatives Mr. Dreiling brought to the position and the progress of them.

One thing is clear, the category has competition, and some of them have begun aggressive initiatives that will enhance their value and erode the value of the Dollar General. Indicators are never singular, there will be other telling signs.

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Carlos Arámbula, Managing Partner, MarcasUSA LLC

Liz hit the nail on the head. Mr. Dreiling may well have wanted to ensure that he was in charge of his assets in the event of his retirement.

Dollar General has been on a tear for years, and there's no reason to expect that its momentum is slowing.

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Cathy Hotka, Principal, Cathy Hotka & Associates

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