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Staying on as a CEO...at 4 percent of your usual pay
JCPenney CEO Ron Johnson at Pier 57 on January 25, 2012 in New York City.
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UPDATE: JCPenney announced on Monday, April 8, that Ron Johnson was “stepping down and leaving” the company as chief executive officer and a member of the board. Penney also said that Myron Ullman, who preceded Johnson as CEO, would return to the post.
Read about the lead-up to Johnson’s departure below.
Corporate heads rolled this week. Among the punishments? Lululemon's chief product officer is leaving after that yoga pants debacle (they turned out to be see-through and had to be pulled from the shelves); Hewlett-Packard's chairman resigned after a botched acquisition, and Chevron docked executive pay over industrial accidents. But none was as extreme as JCPenney. The board of the struggling retailer cut CEO Ron Johnson’s pay by more than 96 percent.
JCPenney hired Johnson away from Apple in 2011 to turn the retailer around. Hopes were high and so was pay. JCPenney offered Johnson a compensation package that topped $53 million -- most of that was in stock.
This year wasn’t so good. "They didn’t give him a bonus, they didn’t give him any equity awards,” says Aaron Boyd, director of research at Equilar, an executive compensation data firm. “All he really had was the salary."
That salary is $1.5 million (plus some perks, of course). That’s still real money, but as large as Johnson’s salary sounds, the pay cut sends a strong message, says Ralph Ward, publisher of trade publication Boardroom Insider. But why didn't the board just fire Johnson?
"That would put the board in a position of, ‘Okay, what’s our fallback plan?’ I suspect they don’t have one," Ward says.
Or the board is willing to give Johnson one more chance, says Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.
"Obviously they believe that there’s merit in the individual and they didn’t think it was time to cut the line," he says.
Elson says the pay cut sends a “we’re not messing around” message to shareholders, but he also sees it as a vote of confidence in Johnson. The board wiped out Johnson’s bonus, but it did raise his base salary.
Cutting pay packages for underperforming CEOs is a growing trend, says Equilar’s Boyd. "Companies are much more sensitive to investor sentiment regarding pay," he notes. "We’re starting to see pay reflect how the companies are performing."
JC Penney declined to comment, saying the company would let its filing with the Securities and Exchange Commission disclosing lower 2012 compensation for Johnson and senior executive "speak for itself."
Because of all the tens of millions of dollars worth of stock he stands to own, Johnson could still make a fortune if he puts JCPenney back on track. "We’ll have to see how it pans out," University of Delaware’s Elson says. "The bigger issue will be next year, do things turn around?
There is precedent for C-suite survival. An Australian bank CEO had his pay cut by 99 percent in 2009. Four years later, he’s still the boss.
The trend of downsizing the corporate ladder is the new approach in order to gain better control over the task and also better responsibility allocation and assessment. The concept of PLI or the performance linked incentive is a good approach to make the organizational environment a better one.
I sincerely hope this is a trend towards "real-sizing" the upper echelons (reversing the stick, for once) and getting back to reality. Seriously, who the hell is worth 53 million bucks a year - especially with the peons making only 40 K - if they are the lucky ones?
No company can remain competitive if they are shearing 20 cents off every dollar of profit just for the top banana, and (IMHO) there is no CEO on earth worth more than a million bucks a year. I would hasten to add that IMHO there is no sports person worth more than a million bucks a year - have you tried to buy tickets to a major sports event lately? And didn't you need to get a mortgage first? Why should spoiled jocks who only work half the year be entitled several times the income of a CEO of a major corporation?
Come at me with all the arguments you like, the CEO's job is to make money for the shareholders, and he/she is NOT automatically entitled to a percentage of that profit as remuneration. That profit-making is his/her JOB - that's what they were hired for and are already paid for - and a million bucks a year is more than adequate reward.
Boards of Directors ought to stop looking over their shoulders all the time at who is going to "steal" their CEO... the same way they contractually build bonuses into compensation for performance, they ought to build in damages and penalties for not fulfilling the tasks the executive/s was hired for.
Perhaps pay a LARGE chunk of that remuneration in something the company can control, such as shares, and if they do not perform as contracted - or jump ship early - the executive loses most (or ALL) of that chunk.
The Greed ride of the last five years is hopefully over. Now let's ALL do post mortems in our Board Rooms and examine how we can stop a tiny number of overly greedy people from ever running away with all of the money and bringing whole countries - nay, the world - to its knees again, and ensure safeguards are in place to stop it ever happening in the future.
Bonuses and awards are based upon performance, since the company did not perform as expected, he did not get paid. I am not sure if that is a "pay cut" or just the agreement he has with JCPenny. a pay cut would be lowering his salary. Awards and bonuses are not guaranteed, so i would not call this a paycut.
