EARNED INCOME

After Supervalu reached an agreement to acquire Albertsons last year, the board considered offering Jeff Noddle, chairman and chief executive officer, a long-term incentive package combining stock options and performance stock awards.

After discussions between Noddle and the compensation committee, however, the committee decided against the full $5 million package and followed Noddle's suggestion that about 10% of that total be directed into a hardship fund for the company's employees instead.

The magnanimous gesture reflects what observers described as a food retailing industry that, for the most part, toes the line when it comes to executive compensation. Salaries are reasonable — if not low — tenures are long and bonuses are tied to performance incentives that benefit shareholders.

The details about the specific components of Noddle's compensation and the compensation of other top officers in the industry might not have been disclosed so explicitly in the past, but new Securities and Exchange Commission rules for disclosing executive pay that have gone into effect this year have made it even easier to see exactly how much the industry's top managers are taking home.

Noddle, the highest-paid CEO among traditional supermarket operators for the recently ended fiscal year, made $11,896,091 according to the new reporting format. Only about 10% of that, however, was from his base salary of $1.1 million — the rest came from bonuses. In fact, 84% of his bonus is performance-based, weighted heavily toward return on invested capital and toward long-term performance measures.

“Compensation in the supermarket industry, with a few exceptions, is realistic,” said Norm Willis, senior partner in the Dallas office of Austin-Michael Executive Search. “From what I've seen, compensation is very fair, and actually there are a few that have done an extremely good job that are underpaid.”

Salaries for top officers have been rising, not so much because of generosity on the parts of compensation committees but because of the performance-based incentives included in their compensation packages. As the supermarket industry itself has surged in the last few years, reflected by gains in same-store sales, profits and returns for shareholders, so have the pay packages of the top officers, observers said.

Base salaries are similar among the largest companies across the industry, ranging from the $1.1 million Noddle received to the $1.33 million for Steve Burd, chairman, president and CEO of Safeway. Despite having the highest base pay, however — slightly more, even, than the $1.3 million earned by Wal-Mart President and CEO Lee Scott — Burd actually earned the lowest bonus among the Big 3 traditional supermarket operators in 2006. His total compensation was slightly below the median $8.5 million total compensation among companies listed in the Standard & Poor's 500, according to one analysis of those companies' filings.

David Dillon, chairman and CEO of Kroger Co., the nation's largest traditional supermarket chain, weighed in with a base salary of $1.15 million and total compensation of $8.25 million.

Detailed Bonuses

Under the new SEC disclosure rules, which went into effect for companies whose fiscal years ended starting late last year and were reported on proxy filings beginning early this year, bonuses are broken down into more detail and compensation for top executives is supposed to be more clearly explained. According to reports, the SEC is planning to examine this year's disclosures to see if any modifications need to be made for future reporting.

Randy Ramirez, compensation advisor in the Retail and Consumer Products Practice at consulting firm BDO Seidman, Chicago, said the new disclosure rules — in addition to creating more work for the employees who prepare the filings — basically forced companies to reexamine the way they compensate their top people.

“Ever since the SEC disclosure rules went into effect, the immediate reaction from companies was, ‘We really need to take a look at what we're doing in terms of our compensation program,’” he said. “Companies are making sure that their compensation practices are in line with their company's goals.”

According to a survey scheduled to be released this week by BDO Seidman, 81% of retailers said the new disclosure rules did not affect executive compensation in any way. Of the 19% who responded that the additional focus on disclosures did impact compensation practices, 45% said those factors have impacted their ability to attract and retain talent.

Shareholder groups, including those affiliated with unions, tended to support the new disclosure rules, with some caveats concerning reporting of stock-option grants.

In the past, Ramirez noted, “Something could get buried or something could be lumped in with other stuff — but now everything has to be separated and has to be detailed in its exposure. That means base salary, bonuses, perks, anything that was awarded to an executive has to be exposed and there has to be some explanation or footnote.”

In Supervalu's case, for example, the company explained in detail how it arrived at its bonus criteria and how those criteria were weighted among the top executives. For Noddle's compensation, Supervalu reported that performance-based incentives made up a larger percentage of his pay package than they did for other top executives at Supervalu, although performance-related bonuses — whether cash or stock — were still a significant portion of total compensation for those other high-ranking executives as well.

That reflects an overall trend among publicly traded companies to find ways to more closely tie compensation to performance-based measurements, especially long-term performance, observers said.

More than 60% of S&P 500 companies awarded equity that was performance-based, according to David Chun, CEO of Equilar, a San Mateo, Calif.-based firm that tracks executive compensation. That was up from less than 50% in the prior year, he estimated.

And although stock-option grants are still the prevalent form of long-term equity, he noted that only about 75% of companies are using options, down from 90% a few years ago.

“Companies are going to stock-based awards, whether it's time-based restricted stock, or performance-based vesting, but you are definitely seeing a healthy balance between the two,” he said.

In the case of the top executives at the big supermarket companies, options made up the largest chunk of compensation last year, although in general companies are shying away from options as compensation because they now have to be expensed, observers said. At supermarkets, option grants tend not to extend throughout the organization as they sometimes do at fast-growing tech companies.

Options at Whole Foods

Whole Foods is an exception in that regard — all 40,000-plus of its employees are eligible to receive stock-option grants after three years at the company. In fact, the company said in its most recent proxy statement filed with the SEC, 94% of the options the company has granted since the plan was created in 1992 have been given to non-executive employees.

“We believe that through our broad-based plan, the economic interests of our team members, including our executives, are more closely aligned to those of the shareholders,” Whole Foods said in the filing.

Whole Foods uses a formula that maintains a 19:1 ratio between the salaries of the highest-paid executives and the average full-time hourly workers. Thus, in 2006, the maximum amount an executive could earn in base pay and cash bonus combined was $607,800, or 19 times the annualized average hourly wage of $15.38.

Stock options and other compensation are added onto that base, however, making the pay much more lucrative than the basic formula might indicate. In fact, Whole Foods claims in its SEC filing that it has “never lost an executive due to compensation.”

“In addition, leadership turnover in the company is less than 2% annually,” the filing stated. “We believe this is a good indication that our leadership compensation package is reasonable.”

Jim Sinegal, president and CEO of Costco Wholesale, Issaquah, Wash., also has a relatively low base salary — just $350,000 in 2006, lower than many of the people who report to him — although he also owns more than 3.6 million shares of the company's stock and has millions of dollars worth of stock options.

Although traditional supermarket companies in general have been fairly conservative in their compensation practices, some external pressures can change that dynamic somewhat, observers said. The growing trend of bringing top management into the industry from other sectors, such as the consumer packaged goods industry, sometimes forces retailers to alter their compensation arrangements.

“The packages the industry is paying today are certainly higher than they have been in the past, but when the supermarket industry goes outside the industry to get talent, at CEO level or similar positions, they are having to put together packages that are more reflective of the sector where that individual came from,” said Jose Tamez, managing partner in the Denver office of Austin-Michael. “It starts a process where it accelerates through the industry.

“If they've got a particular issue that requires the expertise of somebody outside the trade, then they are willing to pay what it takes to get someone from outside the industry,” he said. “It can be the enterprise that is struggling, or a specific department that is looking to chart a new course.

“Whether they are looking to give it one last push before they sell, or to increase their balance sheet before they sell, or whether they are going to try to make a long term go of it, those companies are the ones that are willing to pay,” he said.

One recent example was the hiring of Larry Johnston in 2001 to be chairman and CEO of Albertsons. When Johnston was brought in from General Electric — a company known for producing management talent — he negotiated what observers described as a hefty severance package that was greatly enhanced through his sale of Albertsons last year to Supervalu and a private-investment group. He walked away with a reported $105 million, or three times his annual base pay and bonus combined.

Golden Parachutes

Such “golden parachutes” often capture the most attention because of their huge payouts — generally double or triple the total of a CEO's yearly salary and bonus, according to Tamez.

“When the buyout package is given, that's when shareholders raise a little Cain,” he said. “They typically involve a cash severance of two to three times salary plus bonus, so it boosts the size of the total payment expansively.”

In the case of Johnston, Tamez estimated that his payout would have been one fourth or less than what he earned by executing the sale of the company if he had simply resigned or been replaced by the board.

“Incentives like that add a little momentum toward getting the deal into the end zone,” he said.

Newly hired CEOs are negotiating severance packages “100% of the time now,” said Willis of Austin-Michael.

“Before they ever make one day in the office, they have a package to take care of themselves for a long period of time,” he said.

Such packages are virtually guaranteed unless the executive commits some significant moral or legal breach, he explained.

At Wal-Mart, the company currently is engaged in legal wrangling with its former vice chairman, Tom Coughlin, who claims he is owed pension despite his conviction in a theft case. Julie Roehm, another former Wal-Mart executive, also is battling the retailer to capture some of what she claims she is owed after she was fired.

In general, leaving Wal-Mart is no easy feat, however. As Tamez explained, the company structures its executive pay with equity incentives that are designed to retain people over the long term.

“Wal-Mart pays base, bonus, and stock grants, which can measure up to your base salary,” Tamez told SN. “Those stock grants are something they have used to keep people who are good performers for them, and they are something that not everybody does out there. It makes Wal-Mart people difficult to recruit, and it makes it difficult for them to go, because they leave quite a bit of money on the table.”

He said he's really “not seeing that in the supermarket world,” although he said some privately owed supermarket companies offer an ownership stake through the issuance of private stock, which can have a similar effect on retention.

“The stock grants that Wal-Mart offers generally keep people's feet in the organization,” he said.

Another change observers are seeing is in perquisites, such as company cars.

“Industries, including the retail industry, have been moving away from perks and into more of a standard kind of perk package,” said Ramirez of BDO Seidman. “Because of regulatory changes and tax-code changes, we used to see executives get company cars for example, but now the tax code has just become so burdensome to comply with that, companies just give an allowance for a car, so they don't deal with the car itself, and perks just slowly over time have started to get pared back, and this is just another step in that direction.”

The slow-growth nature of the supermarket industry presents some challenges for compensation specialists, some observers said.

“A lot of supermarkets have resigned themselves to the fact that they are not going to have stunning growth,” said Ramirez. “As a result of that, in the supermarket industry, they have some of the longest-tenured executives compared with other industries. It's somewhat like the energy industry, which is a good parallel, because that's viewed as a mature industry as well, but somehow those companies have been able to break the mold using things like equity.

“It's not uncommon right now to see CEOs [outside of food retailing] rotate every three to five years, sometimes even less,” he said. “But executives have excellent tenure in supermarkets, an industry where demand has continually grown.”

The steady, predictable growth of food retailing is occasionally punctuated by fast-growth companies like Costco and Whole Foods that create new opportunities in the market and raise the compensation standards for the entire industry, he pointed out.

Food retailing also has presented opportunities for cost-cutting, which has allowed top-performing CEOs to earn better payouts by boosting the bottom line despite moderate sales increases.

One of the negative byproducts of having such long-tenured CEOs in the industry, however, is that the upwardly mobile people in the ranks below them often have to leave in order to advance their careers.

He cited Bruce Efird, the longtime supermarket executive who just last week left his position as executive vice president of merchandising at Meijer Inc. in Grand Rapids, Mich., to become president of discount chain Fred's Inc. in Memphis, Tenn.

CEO SALARIES

FOOD RETAILING SALARIES — 2007