- Pages: 4
- Word count: 983
- Category: Stock
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1. Discuss whether the structure of the executive compensation program is consistent with the corporate strategy for each company. At a minimum, consider the mix of compensation (i.e., fixed vs. contingent, short-term vs. long-term, accounting or stock price-based vs. non-financial-based). In your opinion, does the compensation program motivate executives to achieve strategic success?
Kroger’s corporate strategy consists of continuously innovating and creating new ways of bring value to the customer. They were pioneers for many of the things that we now consider norms in grocery stores. In the past, Kroger had rapidly expanded to many store locations to gain market share. This expansion strategy caused them to lose profits in some of their stores. Even though Kroger closed a few of its stores, and the new executive pay structure did no encourage an expansion strategy, Kroger was able to earn higher profit because of it.
Kroger issued a performance based cash bonus resulting from the successful completion of one-year financial and operational targets. As per the case, in 2007 30% of the plan was earned based on identical sales growth targets; 30% was based on EBITDA targets: 30% was based on implementation targets; and 10% was based on performance of new capital projects compared to budget. I think that Kroger should have a percentage of the bonus allocated towards expanding the number of locations, and implementing new innovation in the grocery industry. They missed these two targets that were very important to their overall strategy up to this point.
The additional annual payments for chair of the board of directors and other leadership roles are consistent with Kroger’s strategy of encouraging leadership and innovation. That will give incentive for the board of directors to take leadership roles and lead the company to innovation.
Safeway was more concerned about growth in the latter half of the 20th century. They grew significantly faster than Kroger during this period. Their strategy is consistent with an upscale supermarket that focuses on the ambiance of the store.
Safeway offers bonus compensation for an increase in stock price. This can be motivating for employees to do good for the company, however, the increase in the stock price is a very general goal, and somewhat more difficult to achieve. The company could have a reduced stock price even if its profits are up. Company employees or executives should have compensation tied to specific goals that are easily measurable and can be completed. That way, the employees and executives will be in control of their compensation, and won’t be affected by arbitrary stock fluctuations. To have their corporate package aligned with their overall strategy, Safeway will need to introduce compensation bonuses for expanding the market share by opening new store locations.
Costco’s strategy consists of enticing customers to become members in order to achieve discounts. They don’t try and achieve high margins like the other retail stores, they instead only try to keep margins at 14% and increase the volume of items sold. They increased packaging sizes for many standard products such as detergent to accomplish this. Additionally, they focus very little on advertising, and rather rely on word of mouth.
Seignal receives a bonus based on what he deems an appropriate amount. I don’t think this compensation strategy is very motivational. It would be more efficient to have his receive a bonus based on specific operational or financing metrics. He should be reminded that he works for the shareholders, and his pay should be determined by what the board deems a good performance, not what he deems a good performance.
The deferred pension/vehicle allowance amount is a good way to allow executives to accomplish more with the compensation they receive. This deferral will allow them to achieve tax savings, by transferring their salary to a year where they are in a lower tax bracket. Overall, Costco’s executive and CEO compensation is less competitive than Kroger, Safeway and Wholefoods.
Whole foods strategy consists of high margins on premium and natural foods. They also offer a wide variety of prepared foods for affluent buyers. Managers are given freedom to stock their stores based on local tastes. Mackey also opposed the idea of unions because of their parasitic existence.
Whole foods offer large bonuses to managers based on store performance. Whole foods also offer a maximum executive compensation equal to 19 times the average employee salary. Executives had the right to take time off without pay, therefore, increasing the amount of bonus they could be paid within the cap. I don’t think that this compensation strategy is very motivational. It essentially gives executives motivation to take time off work and still receive the same compensation. The stock compensation for Whole Foods is too arbitrary. They should have specific financial metrics that executives should try and meet, and receive stock compensation based only when those metrics are successfully met.
2. How appropriate is the compensation provided to board members at each company? Comment on levels of payment as well as use of cash and non-cash incentives.
Kroger offered it’s executives middle of the road compensation relative to its competitors. Perks of being an executive included personal use of company airplanes, life insurance and reimbursement of up to $4,500 for financial planning.
Safeway offered the highest compensation relative to its competitors. The Safeway executive perks included limited use of company airplanes for personal use, company-provided automobile for commuting and business purposes, home security system, cost of physical examinations up to $2,500 and life insurance.
Costco executives received low compensation relative to its competitors. Executives received an annual retainer of $30,000 plus $1,000 for each meeting attended. They also received an annual grant of restricted stock.
Whole foods compensation is very heavily weighted on how many meetings executives attend.