KROGER'S NEW LONG-TERM BONUS PLAN RAISES QUESTIONS

Christina Veiders

Why do leaders of most publicly traded companies, including those at supermarkets, deserve the millions in bonuses, stock options and perks they receive each year? Even in the face of poor or lagging performance, the rewards levels often remain high. With this in mind, I decided to explore the significance of Kroger Co.'s board approving last month a long-term bonus plan for "certain key executives," including David B. Dillon, Kroger's chief executive officer and chairman (see SN news brief, Dec. 19 issue).

This is a new plan in addition to an annual bonus and a long-term compensation plan made up of restricted stock options. The reason for the plan, according to Kroger, is that its top executives weren't getting paid enough when compared to the competition and its peers. The plan was instituted to retain talent and make sure executives were getting paid for their performance.

Dillon made $1.8 million in salary and an annual bonus in 2004. Looking at performance, for the fiscal year ending Jan. 29, 2005, the company reported a loss of $128 million after taking a fourth-quarter goodwill write-down of $884 million for its Southern California operations, compared with net income in the prior year of $314.6 million. Sales rose 4.9% to $56.4 billion for the year. Kroger has since reported strong sales and earnings during its last three quarters.

For me, the interesting aspect of the two-tiered plan is its emphasis on tying rewards into improved customer survey scores of people, shopping experience, product and price. That seems to be at the heart of what food retailers need to do to win the competition battle by incentivizing those at the top to deliver customer satisfaction throughout the organization and build loyalty. The second tier was tied to cutting operational costs.

David Livingston, managing partner, DJL Research, says it sounds like Kroger is on the right track with this plan, but he added one caveat. "My concern is the people who deserve those bonuses are really not the top executives but the people satisfying the customers at [store level]."

Another source familiar with executive compensation packages found the plan somewhat puzzling, and asked why Kroger built in another layer on top of what it already had rather than change its existing long-term plan to be more lucrative and competitive. Tying shopping satisfaction into a multi-year plan isn't all that unusual, the source said. He warned that in several years, when it's time for the cash payoffs, theoretically executives could find themselves at cross-purposes with stockholders if the company and shareholders aren't doing that well.

Diane Doubleday, worldwide partner, Mercer Human Resources Consulting, told me the trend in long-term compensation is away from stock options and toward plans - whether they are cash or stock plans - that are closely tied to corporate performance. It is hoped Kroger's new plan is not just window dressing to add more millions to the top echelon's coffers, and it really does tie compensation to performance at all levels, which will benefit the stakeholders, including those at the front lines and Kroger's customers.