Target CEO Pay: One Comp Formula That Works
Executive pay has become such an easy target these days -- not just for business journalists but all three presidential candidates -- that it's easy to lose sight of what really goes into the final compensation figure that shows up in all the headlines. Case in point was last week's news about Target CEO Robert Ulrich having earned more than $140 million in total compensation during his four decades at the company.
All true, of course. Much more interesting, however, are the details of Target's executive compensation formula, which deploys a series of performance-based triggers not just for Ulrich, but for other Target senior execs. Target's most recent proxy statement, released last week, details a nearly 67 percent drop in total compensation for Ulrich in 2007. More interestingly, however, are the details of a savvy payout formula -- the kind of formula that every company likes to preach about, but few actually practice. (Hello, Goldman Sachs.)
Here's how Target's comp formula breaks down:
Base salary. For 2007, Ulrich's base, which is derived from the top quartile of Target's industry peers, was $1,661,538 -- an increase of about $2,000 from 2006.
Performance-based incentives. The incentive payout depends (in a 50-50 ratio) on earnings before income taxes and economic value added, or EVA, a measure that makes sure returns on invested capital are more than the cost of that capital.
Target's 4.5 percent year-over-year EBIT growth missed its 9.9 percent target, and its EVA of $1.1 billion didn't quite reach the $1.38 billion the company predicted. Though the company didn't disclose the target threshold amounts required for payout, it did reveal the EBIT performance earned Target execs a near-minimum payout, and the below-performance EVA negated that portion of the performance-related bonus altogether.
This led to a relatively meager incentive payout of $685,440 -- a 78 percent drop from Ulrich's $3,128,960 in 2006.
Discretionary cash bonus. The compensation committee kept the non-performance-dependent portion of Ulrich's annual bonus relatively intact, awarding him $2.2 million, about a quarter less than last year's $3 million cash bonus, citing his "strong leadership in the CEO transition and a financially challenging year."
Stock options and other income. Target awards stock options, performance-restricted stock, and time-restricted stock as long-term incentives. The performance-restricted stock units vest after three or four years depending on both revenue and earnings per share growth targets. The company missed its four-year revenue goal of 11 percent by 0.2 percentage points, and undershot its 15 percent earnings-per-share goal by 1 percent, which resulted in performance-share payouts in 2007 of 94 percent of the 2003 stock awards. The company also missed its three-year growth target for revenue (also 11 percent) by 0.4 percentage points, but beat the three-year earnings-per-share goal of 15 percent by 2.2 percent, giving a payout of 117 percent (more than the actual award amount) for the 2004 stock awards.
Totaled up, these awards gave Ulrich $12,185,404 worth of stock -- a figure that's not included in reporting the CEO's total compensation. Ulrich also made $93 million from exercising options about to expire in 2007 that he'd earned during his 14-year tenure, which isn't reported in total compensation either.