Bonus Question: Compensating Executives

The base salary for many high-ranking industry executive positions may be leveling off as bonuses, deferred payment and other incentives have begun to play a more prominent role in executive compensation, according to one survey.

An analysis of salaries in food retailing, compiled by Austin-Michael Executive Search, reveals that base salaries for chief executive officers and chief operating officers at companies with $1 billion or more in sales are averaging slightly less than they were a year ago overall.

(Click on the image at right for a larger pdf version of "2012 Food Retail Salaries.")

Total compensation has increased, however, as more and more compensation packages include such add-ons as signing bonuses, stock options and stock grants.

“Those types of programs are being executed, and agreed to, throughout the industry,” said Jose Tamez, managing partner in the Denver office of executive search firm Austin-Michael. “With that, you see a slight regression for some of the base pay for these executives. However, when you look at the individual compensation packages in their aggregate, you can see that they exceed previous total compensation packages of previous years.”

For many executives in the industry, base salary sometimes amounts to 20% to 25% — or even less — of the total compensation they receive.

At Matthews, N.C.-based Harris Teeter, for example, Fred Morganthall, the president of the $4.3 billion company, earned a base salary of $482,000 in 2011, or about 25% of his total compensation of nearly $2 million. That total included $672,000 in stock awards.

“Giving away stock is one of the easiest things companies can do, and in the last few years, companies have done that more and more,” said Tamez. “It’s also become a form of retention at some companies, even at the director level. Wal-Mart has used this in an effective way for years.”

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To some degree, the changes reflect an effort to more closely align pay with performance, as shareholders have demanded in recent years.

In a report issued last month analyzing compensation of top executives at Fortune 500 companies across a range of industries, New York-based Compensation Advisory Partners found that for chief executive officers, the base salary was targeted at 13% of total compensation, with a targeted bonus of 19% and 68% of compensation provided in long-term incentives. For chief financial officers, base pay was slightly higher, at 19% of total compensation, with another 19% in bonuses and 62% in long-term incentives.

Base Salary Trends

Although base salaries for some top-level industry positions might be leveling off in 2012, many companies reported slight increases in 2011, after putting pay raises on hold during the peak of the economic downturn.

At Kroger Co., for example, all of the company’s “named officers” — the ones whose salaries are detailed in filings with the Securities and Exchange Commission — received both increases in base salary and in stock and option awards in 2011. Non-equity compensation (including a cash incentive bonus) also increased for all five named officers.

The Cincinnati-based chain was one of the best-performing traditional supermarkets last year, with total sales up more than 10%.

The CAP report found that many of the Fortune 500 companies had base-pay increases in 2011, based on proxy filings with the SEC. Nearly half of the companies surveyed by CAP — 47% — awarded a base-pay increase to the CEO, and a majority of companies — 78% — increased the base pay of their chief financial officers.

Among publicly traded supermarkets, from small to large, many awarded base-pay increases to their top executives in 2011, according to their SEC filings.

At Sunbury, Pa.-based Weis Markets, for example, base pay for David Hepfinger, president and chief executive officer, increased 3.3% in 2011, to $770,625. His base compensation, like that of others at publicly traded companies, is calculated based on a comparison with the salaries of “similarly situated CEOs.”

His base pay totaled about 25% of his total compensation of $3.1 million, which was slightly less as a percentage of his total pay than a year ago, when his base salary was $745,833 and his total compensation was $2.95 million.

The nature of the deferred compensation at Fortune 500 companies is also evolving, according to the CAP report.

More and more companies are offering performance-based, long-term incentives — 82% of all companies studied in the report, up from 77% a year ago and 74% in 2009. The issuance of stock options and time-based restricted shares remained relatively flat, with 75% and 65% of companies offering such forms of compensation, respectively.

The study also found that retailers were more likely than companies in many other industries to use revenue as the primary metric for calculating annual performance bonuses, as opposed to other financial performance metrics. The other two most prevalent metrics in retail for calculating annual bonuses in 2011 were EBIT (earnings before interest and taxes) and operating income.

Safeway Bonuses

Supermarket companies often tie their bonus structures into same-store sales growth.

Pleasanton, Calif.-based Safeway, for example, which has a multi-layered incentive plan based on a variety of factors, had set a target of a 1.5% same-store sales increase (excluding gas) last year as part of the “operating bonus” for executives. However, because the company only achieved same-store sales gains of 1%, that weighed against executives earning their maximum bonus.

Earnings per share were also used in calculating the operating bonus, and that figure exceeded the company’s target by a small amount in 2011 — $1.71 vs. a target of $1.65.

Had identical-store sales growth been 2% and earnings per share been $1.75, the top executives would have been eligible to earn 100% of the maximum bonus under the operating bonus plan, Safeway explained in its 2012 proxy filing with the SEC.

The recent compensation package crafted for Wayne Sales, who took over as CEO of Minneapolis-based Supervalu in July, reflects the type of creative bonus structure being used in the industry more frequently.

Sales’ base salary was pegged at $1.5 million — the same as Steve Burd, the CEO of Safeway — as well as a signing bonus of $1.26 million. His two-year-agreement also provides a $1 million minimum cash bonus next February at the end of Supervalu’s fiscal year, plus the potential for millions more in stock grants over the next two years.

Tamez said deferred compensation has benefits for both companies and the executives.

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“Executives, for tax purposes, are likely to agree to deferred compensation, which also gives tax deductions to the employer, so it’s a win-win,” he said. “Overall it is becoming more acceptable to people when they sign on to new roles because the overall package is much more lucrative.

“It’s become a more prevalent practice that has found its way into the supermarket industry over the last three to five years or so. It does keep the base salary to an acceptable level, and most companies and most industries don’t want to be outlandish.”

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