Laws of Attraction

MARK HAMSTRA

Congress last week was debating executive pay packages for leaders of failed financial firms in the wake of the recent banking crises, but supermarkets have been struggling with their own compensation issues related to the economy as well.

Long before the recent failure of some Wall Street investment firms, the economic slowdown and the decline in the housing market that accompanied it have put some unusual wrinkles into the traditional recruitment, compensation and retention efforts of food retailing companies.

Interestingly, recruiters say demand for industry executives remains high despite the economic slowdown, although companies are sometimes being more targeted in their new hires and occasionally have to get creative in their offers to lure people away from their current employers.

One of the twists that firms face in seeking to recruit executives was precipitated by the decline in the housing market during the past year. While supermarket firms often provide financial compensation to executives recruited from other markets, to assist them in moving and selling their homes, the sharp decline in home values in some locations has made that a more costly proposition.

One senior vice president in retailing who recently relocated to accept a new position took a $700,000 loss on the sale of his home, according to Jose Tamez, managing partner in the Denver office of executive search firm Austin-Michael.

“I'm talking to people like that fairly often,” he said. “The housing issues of today are putting up some tremendous barriers in terms of hiring individuals.”

Companies that recruit executives from places like Florida, Nevada, California or Michigan, where home values have declined sharply, could be forced to include “make-whole” payments to relocating executives to compensate them for shortfalls on their home sales.

In the case of the executive who lost $700,000 on the sale of his home in order to relocate, the hiring company “was able to help him out a little,” Tamez said.

“It creates a big gap in the compensation and relocation program that's been proposed for a candidate,” he said. “If [the candidate] finds out they are going to lose $100,000 or $150,000 on their home, unless the company agrees to buy it, they have to go through some careful analysis.”

Most supermarket companies, he pointed out, “don't want to get into the residential real estate business.”

Craig Rowley, vice president, retail practice, in the Dallas office of consulting firm Hay Group, offered a similar anecdote about a retail executive who had difficulty selling his former home in California after relocating for a position with a new company.

“They ended up writing him a pretty good-sized check because he got an offer for his home that was dramatically below what his mortgage was,” he said. “The question the company faced was, ‘Do we make him whole?’”

Just a few years ago, companies might have been willing to pay for such expenses without much consideration, but with recent disclosure rules and increasing scrutiny of compensation plans, public companies have become much more cautious about making those kinds of payments.

“If you are in a market where the home market has dropped dramatically and you have an executive-level home, part of the deal you want to negotiate is a ‘make whole’ deal, and of course in this day and age many companies don't want to do that,” Rowley said.

Jean Forney, managing partner with industry recruiting firm Samuel J. Associates in Deerfield Beach, Fla., said she has some client companies that won't interview candidates if their homes exceed a certain value, simply because they are afraid that they will end up having to cover the shortfall in the eventual home sale.

“Our candidates are trying to negotiate extensive time on short-term living expenses, if the offer doesn't include home-purchase programs,” she said. “You wouldn't expect someone who just purchased a million-dollar house to wait for the entire time it takes for a home to sell.”

With supermarket companies paying especially close attention to their margins in the current economy, they are even more reluctant to pay that extra expense, she said.

Typically a relocation contract covers 60-90 days of interim living, plus at least two home-finding trips, real estate fees when the new hire sells their home, and other ancillary things like storage. Executives are also often offered a bridge loan to assist with relocation.

“Now in addition to that, if they are sitting on houses in certain markets like Florida, California, Michigan, they are asking the companies for relief,” Forney said.

More aggressive job seekers who are eager to join a new company might be willing to rent out their former house in order to relocate, she said.

“But others say, ‘Hey, if your company wants me, here are some of the things we are going to have to worry about.’”

Just this month, Steven L. Spinner, who was named president and chief executive officer of United Natural Foods, agreed to a contract that allows him to commute from his home in Virginia to the company's headquarters Connecticut. According to a filing with the Securities and Exchange Commission, United Natural has agreed to provide “reimbursement for reasonable living and transportation expenses in the Providence, R.I., area,” near the company's Dayville, Conn., headquarters, while Spinner retains his primary residence in Richmond, Va.

RECRUITING IN DEPRESSED AREAS

One tactic companies often try is to recruit lower-level managers from economically depressed areas. Matthews, N.C.-based Harris Teeter, for example, recently hosted a job fair in Florida to fill store manager positions in the more upscale markets where it is growing in the Mid-Atlantic region.

Bob Kelley, formerly an HR executive at Ukrop's Super Markets, Richmond, Va., and now president of Pure Culture Consulting, also in Richmond, said he has a manufacturer client that has struggled with that strategy.

“They have tried to recruit from the Rust Belt areas, like Michigan and Ohio, but haven't been able to recruit out of those areas,” he said. “Particularly when it requires relocation, it becomes very difficult for them to leave, even when they know they can find work and make more money.

“Intuitively it's a really good strategy, but the people there still have this connection to their community, their family, their church, so it's tough to bring them in.”

Compounding the difficulties of personal ties like home ownership and community connections is the fact that many companies have done a better job in recent years of building loyalty through financial incentives and improvements in corporate culture.

“Those retailers, food or otherwise, that are creating the best work environment, are going to create better loyalty and better applicant flow, because they are getting the word on the street that it's a good place to work,” said Kelley.

“There's a term called ‘workplace branding,’ where you are getting more and more creative in how you project yourself to attract people to come work for you,” he said. “That trend started before the economy started going down, and we're seeing more companies focus on that.”

Randy Ramirez, a New York-based compensation advisor with BDO Seidman, said executives in the retail industry have been reluctant to leave their current jobs for many reasons, including better retention programs at their current employers.

“People are very cautious — in the back of their mind they are asking, ‘Am I jumping out of the frying pan into the fire?’”

In general, Ramirez said companies have been strengthening their retention efforts.

“This is a good time for employers to buy some loyalty back, and they are doing it, and they are doing it well,” he said. “Employers are saying, ‘Look, this is a really difficult economic time, but when we ride this and when we come out of it, we are going to take care of you on the other end.’”

He also noted that as the workforce ages, many employees are choosing to stick with their current employers rather than take a risk late in their careers.

Retail companies, meanwhile, are making “smart investments” in hiring new talent, he explained.

“They are picking up fantastic people if they appear on their radar,” he said. “Companies are making investments right now, so that when the economy does pick up, they are going to be in a fantastic position to profit from that.”

SUPERMARKET ADVANTAGE

Rowley of Hay Group said supermarkets could be at an advantage over other retail formats in the current economy because they have been performing better. Other segments of retail, especially apparel, have struggled since last year, and the outlook for bonuses is bleak.

“The challenge the broader market is facing, particularly apparel retailers, is that [as of about Sept. 1], the average retailer saw their stock 30% below last year,” he said. “Also, about 62% of retailers in our surveys either paid no bonus or paid a bonus at the minimum level.”

The result, he said, is that retail executives are feeling that their net worth is down, particularly if they have stock options that are “underwater.”

“Even if they have restricted shares, they are 30% less valuable than a year ago, they got little or no incentive for performance in spring of 2008 for performance in 2007, and 2008 bonuses aren't looking very good either.”

The uncertainty of the economy is making the outlook for those companies' recovery unclear as well.

Even though supermarkets have been impacted to some degree by the slowdown, demand to fill executive positions remains strong, recruiters said.

Gary Preston, managing partner of executive search firm Preston-Reffett's Philadelphia office, said his company has not seen a drop-off in industry recruiting.

“We see retailers being more specific and targeted for the types of individuals they are looking for,” he said.

Bill Reffett, managing partner, Preston-Reffett's Seattle office, said that even in the current economy, salaries for key executives have continued to increase.

“Companies are placing a premium on specific skill sets that will help improve their business on both sides of the financial ledger,” he said.

Forney of Samuel J. Associates echoed that finding, noting that supermarkets have had a demand for pricing, marketing and merchandising experts.

“The openings that we have are very cyclical,” she said. “This year, the very hot area we are seeing is in pricing, at the director level and possibly the vice president level, as well as vice president of marketing or chief marketing officer. Anything that has to do with marketing, customer loyalty and pricing are hot topics this year.”

Retailers continue to look outside food retailing and into the CPG industry for such positions, she said.

“Anyone who understands customer segmentation and how to react to what's happening on the macro level is in demand,” she said. “It doesn't matter whether they come from American Express, Macy's or Kellogg's.”

Tamez said food retailers have been trying to make themselves more accommodating to such talent.

“Over the last three years, the marketing discipline has become much more prominent and much more important in the supermarket industry,” he said. “The main reason for that is people are trying to differentiate themselves — they are trying to brand their products, brand their franchise, and they have become much more consumer-centric.

“That is something that the CPG industry basically invented, or at least made it into a science.”

In the past year, he said, he has seen a sharp increase in the number of marketing specialists who have come from the CPG industry into food retailing.

Historically, CPG executives have been “lukewarm” about coming to the supermarket chains, he said, because “supermarkets weren't completely ready for them.”

“It hasn't always been a friendly match in years past,” Tamez said. “But in the past year, CPG people have been more comfortable, not only because there have been more people like them that have been there, but they see the shift in the paradigm — that supermarkets and other retailers are trying to tap into their skills, rather than trying to mold the CPG people to fit into their operational mantra.”