CEO PAY VS. STOCK PERFORMANCE IS STILL NO MATCHUP

DAVID GHITELMAN

The stock prices of most of the largest supermarket companies took a drubbing last year. The compensation packages of many industry chief executive officers took a serious hit as well.

But not all.

Nash Finch Co., Minneapolis, was forced to delay reporting its 2002 third- and fourth-quarter results because of a Securities and Exchange Commission investigation into the company's procedures of accounting for vendor allowances. Its stock plunged 75.14% in the course of the year.

The only two publicly traded supermarket companies that fared worse on Wall Street last year -- Pathmark Stores, Carteret, N.J., (whose stock fell 79.44%) and Spartan Stores, Grand Rapids, Mich., (whose shares tumbled 87.37%) -- now feature newly minted chief executives at their helm.

And yet, Ron Marshall, Nash Finch's CEO, saw his compensation package increase 80.5% in 2002 to $2,785,359.

What gives?

Executives at executive search firms told SN that matching CEO pay to company performance remains a highly inexact science.

Jose Tamez, managing director, Austin-Michael, San Antonio, called aligning pay with performance "the Holy Grail" of compensation departments, long sought after but never found.

Other recruiters pointed out that some of the heftiest chunks of change in CEO packages, such as long-term payouts of restricted stock awards, are negotiated years in advance with an eye to keeping top talent from bolting for a higher salary elsewhere.

Brian Meany, managing director, Herbert Mines Associates, New York, said, "It's ironic when you see those formulas put in the blame column for CEOs for being overpaid when that money is actually put in to retain them."

Consider again Nash Finch's Marshall. What pushed his 2002 compensation so far ahead of the 2001 number was a $1,456,750 restricted stock award, which, according to a footnote in the company's proxy statement, he received as a result of the company's 2000 incentive program, a program that did not begin to kick in until February 2002. Without the long-term award, Marshall's 2002 compensation would have gone down 16.2% to $1,328,609. That still would have given him not quite as bad a year as his fellow Nash Finch shareholders.

Joseph Pichler, chairman and CEO, Kroger Co., Cincinnati, who relinquished the CEO position to David B. Dillion last month but retained the title of chairman, is another executive whose 2002 compensation increase can be attributed to a surge in his long-term payouts. Pichler's package went up 17.9% to $3,934,147, while Kroger stock descended 25.97%. However, much of Pichler's raise came from a 53.2% leap in his long-term compensation, which he received -- again according to a footnote in the company proxy statement -- partially as a result of a 1995 award to bring his pay up to the industry standard and partially from awards budgeted for the year when Kroger would realize synergy savings from its 1999 acquisition of Fred Meyer.

Not all CEO compensation packages require wading through footnotes. Steve Burd, chairman, president and CEO of Safeway, Pleasanton, Calif., and the recipient of a master's degree in economics from the University of Wisconsin, received a salary and a bonus last year and the year before that, and that was all: no long-term awards, no "other" compensation, nothing. His pay still managed to go up 4.1% to $1,258,000, while his company's stock price declined 44.05%.

Several CEOs did see the value of their compensation packages decline even more rapidly than the price of their company's stock. Jeffrey Noddle, chairman, president and CEO, Supervalu, Minneapolis, had his package decrease 66% to $817,078, while Supervalu's stock was only off 25.36%. In 2002, Noddle received neither a bonus nor a restricted-stock award, in contrast to 2001 when he was given a $1,063,683 bonus and a $658,987 award.

Larry Johnston, chairman and CEO, Albertsons, Boise, saw his pay decline 56.7% to $12,223,342 in 2002, when Albertsons stock fell 29.31%. However, Johnston remains the best compensated executive at a publicly held supermarket company, largely due to his restricted-stock award of $9,999,733 in 2002, down from $24,548,214 the previous year.

Whole Foods Market, Austin, Texas, was one of the few large companies whose stock price rose in 2002. This 21.05% increase is outpaced by the growth of the compensation package of John Mackey, Whole Foods' chairman, president and CEO, which expanded by 30.4% to $456,891.

However, Mackey did not get all that money last year. A Whole Foods policy states that no corporate officer can make more than 14 times the average salary of all full-time company workers; all earnings in excess of that amount are deferred. In 2002, the limit was $399,000, an amount exceeded only by Mackey and Walter Robb, the company's executive vice president of operations.

And stock performance is not the only, and perhaps not even the best, measure of company achievement. By some of these other yardsticks, Nash Finch did not do poorly at all last year. In 2002, the company saw its earnings increase 11.1%, as well as improvements in its return on assets and return on equity.

Meanwhile, the recruiters cited the importance of continuing the quest for the Holy Grail of equitable compensation.

Jason Wickline, Philadelphia division vice president at Atlanta-based Judge, observed, "When you look at compensation structures for store directors, mid-level managers [and] support functions for corporate regional offices, often bonus programs are tied directly to company and individual performance, and if either falls short there is no bonus paid. A CEO should be held at the same standard."

How Some Top CEOs Fared Last Year

Executive

2002 Salary

Bonus

TOTAL COMPENSATION

% Change Vs. 2001

Joseph A. Pichler, chairman, CEO, Kroger Co.

$1,284,615

$173,250

$3,934,147

17.9%

Lawrence R. Johnston, chairman, CEO, Albertsons

1,288,269

644,644

12,223,342

-56.7%

Steve Burd, chairman, president, CEO, Safeway

1,000,000

258,0001,258,000

4.1%

Jeffrey Noddle, chairman, president, CEO, Supervalu

812,5000

817,078

-66%

Christian Haub, chairman, president, CEO, A&P

752,000

0

789,962

-35.5%

Ron Marshall, CEO, Nash Finch Co.

673,149

507,303

2,785,359

80.5%

Eileen Scott, CEO, Pathmark

372,115

0

379,096

-70.5%

John Mackey, chairman, president, CEO, Whole Foods

302,000

150,000

456,891

30.4%

Norman Rich, president, CEO, Weis Markets

555,000

8,235

598,988

-15.8%

Robert Ingle, chairman, CEO, Ingles Markets

170,045

0

172,458

0%

Companies listed are the largest public food distribution entities for which 2002 compensation data was available.

Including long-term and other compensation.

Compensation compared to James Donald, Pathmark's former top executive who resigned his post in October 2002.

Source: SN Research from company proxy statements.

And How Companies Performed

Company

Stock price Change

Sales Change

Earnings Change

Return on Assets

Return on Equity

Kroger

-25.97%

3.3%

15.5%

6%

31.3%

Albertsons

-29.31%

-2.7%

-3.3%

3.2%

9.3%

Safeway

-44.05%

0.9%

Supervalu

-25.36%

-5.4%

29.6%

4.4%

12.8%

A&P

-66.11%

-1.8%

Nash Finch

-75.14%

-2.7%

11.1%

2.5%

10.7%

Pathmark

-79.44%

-0.6%

0.9%

3.7%

Whole Foods

21.05%

18.4%

24.5%

9%

14.3%

Weis Markets

11.05%

1.4%

18.2%

8.3%

10.7%

Ingles Markets

-3.18%

0.4%

-17.5%

1.5%

6.2%

Stock change based on 2002 calendar year; all other numbers based on company fiscal year.

Net loss in 2002.

Net loss in 2001.

Sources: SN Research; Stock prices from Data Network; all other numbers based on company annual statements.