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Examining CEO Earnings

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There is no perfect formula for determining executive compensation. More surprising, there are few industrywide practices that define how much a retail CEO should be paid, or how the compensation should be split between base salary and other pay.

In most public retail companies, a compensation committee works in concert with a third-party consulting firm to make recommendations on the annual compensation packages for executive officers. The recommendations are based largely on assessments of peer retail companies.

However, even when comparing like companies, the disparities and similarities between CEO compensation defy conventional wisdom.

Brad Ellman, managing director of New York City-based HVS Executive Search, recently analyzed the CEO compensation packages for fiscal year 2007 at more than 100 retail companies.

“We were looking for a correlation based on a hypothesis that the total compensation of a CEO would increase as market capitalization, meaning the amount of investor dollars poured into a company, goes up—that would seem to be a logical assumption,” stated Ellman. “Beyond that, we were looking for any trends with regard to the mix of compensation a CEO might receive given the sliding scale of market capitalization.”

Ellman found a moderately low correlation between market capitalization and CEO compensation and a statistically zero correlation between market cap and the particulars in the mix of compensation. “This is surprising,” he observed. “You would think the bigger the company the more a CEO would get paid because the job has greater complexity and requires more work.”

For instance, he noted, “The market cap of The Home Depot is nine times that of Ross Stores and yet the CEOs are paid almost identically.”

In addition to its higher market cap, Atlanta-based The Home Depot recorded sales of $77.3 billion in fiscal 2007, with net income of $4.2 billion and a portfolio of 2,234 stores supported by 331,000 employees. Conversely, Pleasanton, Calif.-based Ross Stores had $5.975 billion in sales, $261 million in net income, 890 stores and 39,100 associates.

Francis S. Blake, the 58-year-old chief executive of The Home Depot, was paid a base salary of $1.007 million and his total compensation for 2007 was $8.282 million. Ross Stores’ CEO Michael Balmuth, also 58, earned a slightly higher base salary of $1.017 million and total compensation of $8.488 million.

Aside from the dramatic differences in the size of the two companies, what also contrasts the two CEOs is their seniority within their respective organizations. Blake joined Home Depot in March 2002 and assumed the CEO responsibility in January 2007. Balmuth has been with Ross Stores since November 1989, and CEO since September 1996.

Seniority and longevity in the CEO position clearly impact the pay scale across retail companies of all sizes. Consider Dennis H. Nelson, the 58-year-old chief executive at The Buckle, who started working at the Kearney, Neb., retailer in 1970 and became CEO in 1997.

With 365 stores and 6,700 employees, Buckle’s footprint is tiny beside the likes of Home Depot. However, Buckle continues to out-perform most retail companies, reporting last month that same-store sales were up 14.5% in October over the same period in 2007 and total sales for the month increased 20.7%. In fiscal 2007, total sales were $619.8 million and net income was $75.2 million.

Success bodes well for CEOs regardless of company size. Nelson’s 2007 base salary of $835,000 was only 4% above his 2006 base of $805,000, but his total earnings were almost double the prior year: $6.05 million vs. $3.18 million.

Bottom line, acknowledged Ellman, “There are probably as many reasons and factors entering into CEO compensation plans as there are companies.”

© 2014