Macy’s Ties Exec Pay to Stock Price
It’s not unusual for retail executives holding
stock options to benefit when their company’s share price improves. In
the case of Macy’s, executive compensation is taking on a new twist. For
top managers to fully benefit, the share price not only has to improve,
it will have to perform well versus 10 other retailers.
According to a filing with the Securities
and Exchange Commission on March 24, if in 2011 Macy’s share price is in
the top third of a list that includes Dillard’s, Gap Inc., J.C. Penney,
Kohl’s, Limited Brands, Nordstrom, Sears Holdings, Target, TJX Companies
and Wal-Mart Stores, then participating executives would get 100 percent
of their stocks. If the price falls between the top third and half, the
execs would receive 75 percent. Falling into the bottom half would mean
CEO Terry Lundgren, CFO Karen Hoguet and vice
chairs Thomas Cole, Janet Grove and Susan Kronick get
nothing.
Burt Flickinger,
a consumer industry analyst with SRG Insights, praised Macy’s performance
in the current environment and told Marketplace the new plan could
benefit the company.
"The department store sector has been slowly dying for
years, and many of the major chains may be dead within a couple quarters.
And Macy’s is doing a heroic job to hold on," Mr. Flickinger said.
Tom LaWer, a partner
at the compensation consulting firm Compensia,
said other companies are considering plans similar to that adopted by Macy’s.
"There’s a natural inclination on the
part of executives to ask for new stock options at a low price. And a natural
inclination on the part of the stockholders to say, ‘No, you need to suffer
the way we’re suffering.’ So that’s breaking down," Mr. LaWer told Marketplace.
Discussion Question: Will Macy’s new stock
option plan result in a higher level of performance by the company? Do
you see any dangers in this plan? What other thoughts do you have on
executive compensation in the retailing business?
I would agree with the premise that many department stores are dying. These guys will do whatever they can to raise stock price and line their pockets–like the rest of publicly-traded companies. When I can walk into a Macy’s as I did a couple nights ago to an entire first floor run by 3 employees–management has already voted for their own hides instead of the customers. I’ll be writing about that experience next week on my blog www.bobphibbs.wordpress.com
I applaud the executive team and board of Macy’s. I’ve been confused when I hear that a company is struggling and their top executives are paid huge bonuses. Why are they receiving a bonus? I’ve always believed that a bonus is paid when you achieve the results that were expected and in many cases exceeded. We see issues with this in the airline industry–let’s cut the pilots pay by 50% and give millions to the senior executives. Or the current AIG debacle! Please…The only decent word that comes to mind is rubbish! I understand when you are very close to your objectives or when there are extenuating circumstances! When you miss the budget by a mile, why should you be paid a bonus??? Leaders are those that understand where the business is headed and what changes need to be made to deliver on share holder value. Miss those signals and fail to proactively determine the best course of action and bonuses should not be paid.
Macy’s is making a series of very good decisions. I think they are doing more than just holding on. Congratulations, I believe they have what it takes to survive and thrive!
In theory tying executive stock options and bonuses to stock prices appears to benefit the owners (stockholders). This is intended to have management’s incentives lined up with the stockholders. History has proved this is not the way to go. When the primary incentive is stock price, management makes short term decisions to achieve their goals, but fails to support the long term interest of the enterprise. More than one company has pushed up its stock price only to fall as a broken company a few years later. Executive compensation should include return on assets, growth measures and achievement of goals – both budget and people development. This approach will support and increase stock price. Stock price should only have a weight not to exceed 10% as there are external factors that impact it.
Frank Dell and David Livingston are so totally on target here, there’s nothing left for me to add.
Instead of tying the bonuses to the stock price performance they should be associated with the key performance indicators of the company.
Rewarding the ability to manipulate the market price in the short term will fail as it has with many other companies. Why not reward strong balance sheets, consistency in revenue growth, healthy gross margins, and store level excitement as measured by consumer data?
Macy’s needs a fresh, forward thinking approach to everything they do, especially executive compensation.
Everyone knows stock price is not the primary indicator of a company’s true success or long term health, and at this point in economic history, even less meaningful than usual. Looks like the current board is handing Macy’s top managers another three year “trial period” rather than forcing needed changes at the top that have been obvious for a couple years now.
Frank and David rightly point out the pitfalls of tying compensation to stock price–but what if the metric got changed to long-term growth in stock price? Then we might have management show some interest in the survival of the company-a new meaning for the phrase ‘turning Japanese’.
But that really doesn’t get me past my beef with Milton Friedman in the long run. If a company’s only obligation is to its shareholders, then it has no obligation to its customers. And if it markets itself as a customer-caring retailer and then withholds the service it has promised, it will expose itself as a fraud–punished in the marketplace or possibly in the courts if real damages are involved.
Fundamentally, though, I do think the department stores’ business model has a problem. They clearly can’t offer the service of a Nordstrom–even Nordstrom isn’t offering that level of service these days, I hear–at the price points of a Kohl’s, with the overhead of the square footage they occupy. And they have no concept of how to out-specialty the specialty stores. No doubt those are the price points they need to make their model at least tenable–and right now there’s no room at the Inn.
Retailer or not, I like the tying exec compensation to company performance. Good for Macy’s for moving in the right direction. However, it won’t cure what ails the department store channel. It should motivate execs to perform some much-needed CPR, but major surgery still awaits.
I’ll second Warren’s endorsement. Unless this is not the whole story (i.e. this is only one incentive metric, publicized to boost Macy’s populist cred) the Board is essentially saying “Wall Street is a better judge of a well-run retail operation than we are.” Right now I’m not sure Wall Street’s judgment is so hot.
I think this is a great way to hold the key executives accountable for the performance of the company. They should only be compensated for success, and if they fail their compensation should reflect the failure.
That being said, I don’t think this is going to save Macy’s. Walk into their stores, and see if it is a great shopping experience. It isn’t, and it seems to be getting worse, not better. The days of department stores being a destination are over. As was discussed in posts yesterday, with Zara and H&M performing so well, how can old line department stores continue to survive. I think their days are numbered, no matter what the compensation program might be.
I think executives should be compensated on a variety of factors to include performance, profitability, and market share growth. Stock price is often no reflection on how well a company is truly performing. Sometimes short-term profits must be sacrificed for long-term market share.
Perhaps Macy’s should compensate executives the way privately-held companies do. We have all seen the tragedies caused by overzealous executives who desperately cut expenses and raise prices to get their short-term numbers in order to impress Wall Street. Then they collect their bonuses and run, leaving a mess behind for others to clean up. We have also seen stock prices fall just on panic selling when there was no negative news affecting a company.
Finally, Macy’s has no control over the stock price of its competitors. Those prices could drastically rise or fall due to factors mutually exclusive to the retail industry.
I may be mistaken, but I think the unspoken comment of many here is that they don’t think very highly of Macy’s current management, so any tinkering with compensation is likely to be fruitless.
Whether this configuration of reward for performance is the most effective is one question. While other configurations may also be just as effective, more effective or less effective is an important debate. However, the approach that ties reward to performance is critical. Rewarding executives for failing companies is just not appropriate. Tying reward to position in a ranking with peers helps to mitigate the arbitrary nature of a single number.
However, is this the incentive that is needed to re-think the department store as a vehicle and create an environment to which consumers are not only attracted but also find as a reason to make purchases?
Maybe individual departments need to be benchmarked against competitors specializing in that category, such as housewares benchmarking themselves against Le Seur or Williams Sonoma and the housewares section of Penney’s, Kohl’s, or Sears.
The ethical makeup of Wall Street’s varied denizens has come into question from almost every possible source recently. If you haven’t already, I suggest you all visit the Daily Show website for the discussion between Jon Stewart and Jim Cramer. This in part revealed how false leaks could sink a stock.
What kind of corporate management would build its game plan based on success in the stock market? Has the board bought into this gambit? If so I suspect the stockholders will soon be up in arms.
Really dumb idea, for all the reasons noted above–this sort of bonus incents short-term thinking.
That they would even consider such a compensation package, which has been tried and failed in other companies, is another demonstration of how devoid of new ideas the department store industry is.
Why do these super-smart execs need such an oversimplified pass/fail metric? Can’t they handle a harder goal like, say, “Make Macy’s Great,” with the *board* deciding independently if progress is being made? Yes, it’s subjective and complex, but these guys should be up to the challenge. Simple-minded metrics are more appropriate for jobs like burger flipping, yes?
The built-in uncertainty in a vague goal would:
(1) Encourage the execs to stay connected with the board throughout the year. Changes in the economic climate, customer sentiment or competitive landscape would become an intelligent, ongoing discussion. Both sides would *continually* have to do their homework.
(2) Encourage the execs to deeply explore, examine and readjust the meaning of “Make Macy’s Great.”
(3) Reflect the uncertainty of the real world.
(4) Encourage the execs to consider the whole business and the customers and communities they serve, with less focus on deriving personal riches from deftly manipulating a simple numbers game.
Executive compensation tied to the performance of core operations as benchmarked against the competitive field has great merit. I don’t believe that tying the same to market performance of their stock brings the same value to long term investors in the business. It is the long term performance of a business that benefits owners (aka shareholders) who are looking to a solid business plan and operations. Be aware that incentives will often bring about results that are incented.
There are many ways to juice up the market value of the stock market, as we have so clearly seen recently. While short-term market players would like nothing better than to go along with that ride, it would do little to build a company’s long-term business for all of its stakeholders, including shareholders, employees, and the communities that they serve. The profile of America’s great companies of the future would be better served by compensation plans that incent long-term shareholder value, not blips in the market value.
My congratulations to M for thinking outside the box, but I believe that they would be better served with a longer time horizon in their benchmarking.
This type of incentive plan is well intentioned but perhaps puts too much emphasis on short term results. There are many tactics that look good from an accounting perspective but are terrible for the long term value of the firm. Examples include service staff reductions, or homogenization of merchandise assortments. These tactics might look good on paper but in reality they slowly drive customers away from a brand. The impact is not immediate, customers first have to visit, notice the change, and then choose to take their business elsewhere. It can be a very risky plan to base compensation on stock price. People tend to do what they are paid to do, and activities that favor short-term thinking over long-term strategy can be bad for shareholders.