Should executive pay structures change to address slower growth at retail?
With profits, sales and stock prices declining for many retailers last year, executive compensation for the industry took a hit.
A study of major retailers from Korn Ferry found 73 percent paid little to no bonuses to senior executives in 2017 for 2016 performance. Of those surveyed, 35 percent paid no bonus and 38 percent paid only small bonuses to their executives.
Only 15 percent of the retailers paid senior executives their target or above bonus amount in 2017.
The study of 40 major North American retailers also found a descending rate in those receiving bonuses. Compared to the 35 percent receiving no bonuses in 2016, 25 percent went without a bonus in both 2016 and 2015, 11 percent in 2014 and 10 percent in 2013.
“Bonuses are typically tied to the performance of the retailer, and historically about 50 percent of retailers achieve their business plan for profits and pay executives their normal bonuses,” said Craig Rowley, a Korn Ferry senior partner specializing in the retail industry. “The fact that this year only 15 percent of companies met or beat their expected profit plan and paid full bonuses to executives exemplifies the challenges facing the industry.”
Korn Ferry implied that pay gains will be difficult in the years ahead with minimum wage hikes across U.S. cities impacting margins and many retailers failing to offset lower foot traffic with e-commerce gains.
A recent report from Alvarez & Marsal noted that many compensation programs at retail are too focused on same-store sales and operating income growth that support building scale and adding stores. Given the “difficult, but necessary” steps required in the current climate, strategic investment and operational efficiencies become bigger priorities.
As a result, the turnaround consultancy argues that rather than typical broad incentives across the c-level, compensation for pivotal roles such as merchandising, store planning and allocation and digital need to reflect the time frame and tasks of any turnaround. Stated Alvarez & Marsal, “As retailers navigate these conditions, they need to ensure their people strategies and compensation programs are flexible and supportive, not rigid and dated.”
Discussion Questions
DISCUSSION QUESTIONS: Do you agree that current pay structures for retail executives are misaligned with the realities of the business at this time? Is the retail industry facing an executive recruitment and retention challenge any more difficult now than it has in the past?
Poll
BrainTrust
Chris Petersen, PhD.
President, Integrated Marketing Solutions
Lyle Bunn (Ph.D. Hon)
Strategy Architect – Digital Place-based Media
I think that reality has set in for many retail chains and frankly, executive pay for some have been too high. The argument has always been that we have to pay top dollar to attract top employees. But through the years, the bonuses were not sitting well with lower-level employees who feel they work just as hard. It’s hard to motivate a minimum wage employee when they read about their CEO taking home millions of dollars.
I’m all for rewards and incentives and I believe in capitalism letting anyone earn as much as they can. But with so much pressure today for retailers to survive, the days of the big executive bonus needs to be rethought, and they should address a better payment structure. I also feel that store-level people should have an opportunity to earn more money if they perform better. Perhaps retailers should look at performance incentives for all employees.
All compensation is ultimately linked to broader economic factors but executives have the authority and responsibility to perform better against rivals. The big problem is cost cutting toward quarterly profits that can impede investment that shows longer-term rewards. Ultimately the board should ask, what did you do to increase our brand asset creation and protection, and improve our defensible positioning in our current market, as we pivot into profit-generating lines of business?
While it is true that pay structures are misaligned, the fact remains that compensation should be commensurate with the size of the business one runs, meeting certain objectives (not all related to pure growth) and, eventually, profitability.
It’s really hard to see the dismal performance of so many retailers correlated to (the dearth of) bonuses and suggest they are misaligned. If anything it is encouraging to see the bonuses so well correlated, especially as many retailer CEO salaries are still exorbitant when their performance is considered. It’s easy to cite a rising minimum wage and declining traffic as complicating factors but ultimately it’s up to the board to determine CEO pay and how it is structured relative to the business situation, strategy, leadership and, yes, performance.
Base pay doesn’t need to change. The job has not changed — if anything it is harder. What needs to change is the measures incentive pay is based on. If same-store sales are not what is driving growth and profit these days, then find the right measures that do and switch the incentive program to be based on those. Then if the performance doesn’t come — the incentive pay shouldn’t come.
Results count … everything else is conversation.
Executives get paid for producing results. However, there is a danger in focusing on just the short-term quarterly and annual results.
Executives, particularly the CEO, are also responsible for vision and strategy. There has be some sort of flexibility in the overall compensation to incent key executives to stay long enough to implement the strategy.
The current pay structures for CEOs in most industries are misaligned and generally too rich. Retail is not the only industry going through significant changes, yet executive pay scales soar while management tries to hold line employees to minimum wage. Retail boards of directors and Wall Street need to reset their metrics and expectations. Compensation should be based on strategic performance, not same-store metrics or quarterly numbers.
At the end of the day people will demand to make a certain wage and if they aren’t getting it, they move on. Most of the above comments seem to be right on target. If a retailer pays a fair wage, there is no need for bonuses. When too much emphasis is put on the bonus, that’s when you see all kinds of games being played to skew the results. One time at FW Woolwroth, in order to get our bonus we needed more sales. So the employees made large purchases at our store and returned the items to a nearby sister store. We cheated, got our bonus and the management at the other store didn’t. We got away with that once.
Across all industries executive pay is often attached to “metrics” that don’t reflect overall business health. It’s not a bad political strategy to give the impression of smart management. But it doesn’t recognize what Deming observed — that aggressive management to metrics leads to perfectly managed companies that fail.
Put this up against the reality that we are in a period of retail evolution where metrics will change rapidly and constantly. We do not know today which numbers will be most meaningful in two years.
So … yes. Executive pay structures should change. But in changing we need to be quite wary of how pay packages can entrench dysfunction and, perhaps, we need to try to return to a more human reality — that most people prefer to do the important things rather than just hit metrics.
How can executives be compensated in ways that encourage the team to come together in crisis and drive creative answers that create future success? Incentivizing according to fixed metrics seems like a poor tool for causing that to happen.
If we start revising performance metrics away from the traditional ones that have always “paid the bills” just because they may show declines (e.g., same-store sales, etc.), then we have even bigger fish to fry than just executive compensation strategies. We do have a recruitment problem to get recent graduates into the retail business as a career, however there is no challenge to get qualified senior executives to fill posts at the top of retail organizations, whether they come from retail or outside the industry. We must continue to offer attractive comp packages to capture the best people to run our retail companies. That shouldn’t change.
Pay at the executive level will always be higher. I like when part of the compensation is tied to results. I remember years ago one of my favorite clients paid all of their executives the same base, which was very low (under $50K). However, if they hit their numbers, they were well compensated. Many made seven figures — all on top of their low base.
Retail is a tough business and the executive bonus stats shown here are reflecting that. If you consider all the topics we discuss here day after day about what retailers need to do to improve their performance, you have to ask if retail executives are getting incentivized on the wrong performance metrics. Do sales results count? Yes. But what about investment in the business, which all retailers are struggling with today? Growth is another important factor, but sales and growth alone are not the only ways retailers are being judged by today. Executives should be compensates accordingly beyond just those two metrics to reflect an appropriate vision for the business that shows it will survive for many years to come.
It is the board of directors that must approve the chief officers of any company. So we might turn our attention to them and the stock options and bonuses they get for the jobs they are supposed to do. Investors need to look at the quality of the board of directors along with other considerations before investing and/or staying invested. Money talks and the more money that moves out the quicker and better the changes.