As Grocery Stores Struggle, Some CEOs Get Bargain-Bin Bonuses

Bonuses for many grocery executives were curbed last year as the sector faces competition across several fronts and a historic decline in food prices, possibly making it harder for retailers to attract the kind of talent they need to turn around their businesses.

Chief executives at the 10 largest U.S. grocers received a total of $6.6 million in performance-based pay last fiscal year, down 40% from $11 million in 2015, according to ISS Analytics, the data arm of proxy advisory firm Institutional Shareholder Services Inc. Some companies eliminated bonuses altogether.

That contrasts with the broader corporate sector, where incentive pay has steadily increased, growing 3% in 2016 from a year earlier.

While most other industries have benefited from improving economic conditions since the recession, grocery retailers are facing intensifying competition from online merchants, discounters and new ways to buy food like subscription meal-kit services, even as deflation has eroded food prices.

Same-store sales were flat across major food retailers last year after rising by at least 3% each of the three years prior, according to a FactSet industry average. Grocery stocks are down by an average of 5.4% so far this year.

"The food-retailer space has been hit harder," said John Roe, head of ISS Analytics. "It's clear that in aggregate there was a sharp reduction in annual incentive payouts."

Only one of 10 major food retailers, Casey's General Stores Inc., raised its chief executive's bonus last fiscal year, compared with more than half of the 3,000 biggest public companies, the ISS analysis shows. CEOs of household- and personal-product firms saw the biggest jump in compensation last year, followed by executives at food, beverage and tobacco companies and those leading utility businesses, while retail heads fared the worst.

Long an executive staple in other industries, performance-based bonuses are newer in the grocery sector, which more recently has tapped them to attract outside talent, according to management consultants.

But if the industry remains stagnant, it could become harder to recruit the kind of younger, tech-savvy executives that grocery stores needs to compete with and other e-commerce food-sellers, industry analysts and recruiters said.

"It creates a lot of uncertainty," said Jose L. Tamez, managing partner for Austin-Michael, a Denver-based executive recruiting firm focused on food retail.

The hit comes as base pay for food-retail executives has also fallen. Salaries for CEOs at large food retailers averaged $1.5 million last year, down 14% from $1.75 million in 2012, according to an analysis of 32 supermarkets by Austin-Michael. Other C-suite salaries fell by single digits.

Kroger Chief Executive Rodney McMullen received incentive pay of $720,000 last fiscal year -- a quarter of the $3 million he made in 2015. The cut followed Kroger's largest miss on performance-based milestones since 2002.

A company spokesman said Kroger, the nation's largest supermarket chain, remained confident it would deliver growth for investors and was committed to having executive bonuses rise "when performance justifies doing so and decline when it does not."

Whole Foods Market, Inc., for the second year said it wasn't awarding bonuses to executives, as the natural-food grocer deals with flagging sales. Sprouts Farmers Market Inc., Publix Super Markets Inc., Supervalu Inc., Natural Grocers By Vitamin Cottage, Inc., Village Super Market, Inc., Weis Markets, Inc. also eliminated or slimmed down performance-based bonuses during their most recent fiscal years.

"Across our industry, 2016 was a challenging year," David Hirz, chief executive of Smart & Final Stores Inc., told investors.

Persistent deflation in food prices prompted the California-based grocer to cut its targets last August to make bonuses more achievable. Though the warehouse-style grocer couldn't hit most of the easier metrics, Smart & Final gave out $518,840 in discretionary bonuses last fiscal year based on its success in expanding store count, a spokeswoman said.

If the industry's troubles persist, executives and recruiters say companies will need to revise their performance targets or provide some other kinds of incentive.

Still, providing compensation that's too large would be off-key, consultants said. "Business is bad. It's pretty hard to justify big compensation when business is so down," said Bob Goldin, co-founder of food-industry strategy firm Pentallect Inc.

(END) Dow Jones Newswires

June 10, 2017 09:14 ET (13:14 GMT)