Walmart

Annual Meeting: May 30

Walmart CEO Doug McMillon’s total compensation of $22.8 million certainly let’s him live by Walmart’s slogan to “save money and live better,” but the story for employees and long-term shareholders is different.  McMillon received a salary of $1.28 million, $15.69 million in stock-based pay, $4.74 million in non-equity incentive pay and another $1.1 million “other compensation.”

Walmart’s pay ratio reflects a business model that perpetuates income inequality and undermines its own growth

Walmart's CEO earns 1,188 times as much as the company's median worker.

In other words, it would take 11 such employees a century to earn what the CEO made in 2017.

It would take 100 such employees more than a decade.

WalMart is the largest private-sector employer in the United States, with approximately 1.5 million employees. Half of them take home less than $19,177 per year.

A consumer facing business requires consumers that have discretionary income, as Henry Ford famously observed when he raised wages enough so that employees could purchase his automobiles. Many of the products sold at WalMart are staples that can and are often purchased with food stamps. Much has been written about the way that Walmart’s low pay means that employees rely on government assistance to make ends meet.

Even shareholders who have no moral compunctions or broader concerns about income inequality should read this Wall Street Journal report Consumers Care About CEO-Employee Pay Ratios: Companies with big pay gaps could see their business affected as new SEC disclosure requirement takes effect. The researchers first looked at evidence garnered following a 2009 referendum in Switzerland where citizens voted on whether to cap CEO pay ratios at 12 to 1. While the initiative failed (though it garnered 1/3 of the vote for a capped ratio that is approximately one tenth of Walmart’s) it shed publicity on pay ratios at different companies. Researcher found that during that period companies’ “sales decreased when their pay ratios increased and pay ratios were in the news.”

In another experiment the researchers offered participants a chance to win a gift card from one of two retailers in return for filling out a survey. In the first run of the experiment no information was offered on CEO pay or pay ration and 68% chose the first retailers card and 32% chose the second. When participants were given data that showed the first retailer had a very high pay ratio and the second a low one the change was dramatic: only 44% chose the first retailer and 56% chose the second. “Our results suggest that companies blowing past what people see as reasonable ratios of CEO pay to worker pay could take a hit to their business if the pay gaps are publicized.”  

Unequal pay can have a profound effect on employee morale and performance. There’s academic literature that backs that up, and shoppers can tell the difference too. This is another way in which Walmart’s CEO-to-median-worker pay ratio undermines its growth.

I personally make as a consumer based on some of these factors. It is why I, and many others I know, shop at Costco a company that I view as almost the inverse of Walmart. I look forward to seeing Costco’s pay ratio when that company’s next proxy comes out.

 

Buybacks reflect a non-sustainable strategy

WalMart, like so many other companies, has been very active in buying back its own stock. These widespread buybacks keep stock prices and executive compensation up, but often represent a failure of management. Basically, Walmart contends that the best use of money is to purchase its one shares. That money could be spent in any number of other ways, including necessary capital expenditure, such as investing to keep stores fresh and attractive.

It could also be spent to increase employee compensation. Walmart trumpeted the fact that it would be using a portion of its tax windfall to raise its starting wage to $11 an hour (which would result in an annual salary of less than $23,000 if an employee were working full time – few do) and offering some bonuses. However, the amount is overshadowed by the much larger amount they spent on buybacks. 

On May 22, the Roosevelt Institute issued a report Making the Case: How Ending Walmart’s Stock Buyback Program Would Help to Fix Our High-Profit, Low-Wage Economy that examines how money spent on buybacks could have instead had a significant impact on the company’ employees. According to the Roosevelt Institute, Walmart “spent $14.4 billion in 2017 on shareholder payouts, by repurchasing its own stock and issuing dividends, and is authorized to spend $20 billion on ‘stock buybacks,’ formally known as open-market share repurchases, in 2018 and 2019.” The longer term figures are even more striking over the past decade Walmart spent $67.8 billion on stock buybacks. Since Walmart’s profits 2017 were $9.8 billion, the company spent more giving money to its current shareholders last year than it earned. Debt-financed buybacks go beyond the often-used buyback analogy of “eating your seed corn.”

The Roosevelt Institute calculated that by spending $10 billion on increasing wages rather than buybacks
“1 million low-wage Walmart employees would see an hourly wage increase of over $5.66.”

 

Pay for performance promises broken

Sometimes with big chain stores what you are promised is not is not what you ultimately receive. The packaging can be splashy but the goods may be poorly constructed. 

Bloomberg broke a story soon after the release of the proxy noting that McMillon was awarded a higher cash bonus than he would have been if a 2017 commitment – to reduce incentive opportunities --  had been honored.

Specifically Bloomberg notes: “The board’s compensation committee awarded McMillon a $4.74 million bonus for the fiscal year ended in January, or 116.4 percent of the target . . . The problem is that it used a target of $4.07 million to calculate the CEO’s fiscal 2018 bonus instead of the $3.05 million target that Walmart provided in last year’s proxy statement, representing a 25 percent cut from the fiscal 2017 target.”

That commitment in the 2017 year’s proxy statement was part of bold language highlighting compensation improvements, and described under a section on “what we changed.” The company mentions all the shareholders it met with and added that it conducted a comprehensive review of overall compensation and performance management programs. Among those changes: “Reduced annual cash incentive opportunities by 25%.”

The paragraph that introduced the planned reduction in bonuses stated explicitly that “changes will take effect beginning in fiscal 2018.”  WalMart has been trying to dial that back.  Walmart spokesperson Randy Hargrove told Retail Dive in an email that the bonus cuts weren't meant to happen until 2020. "A transition component for the program was inadvertently not reflected in the 2017 proxy statement, however we do not believe this was material to the overall description of our executive compensation program,” said Hargrove.

There only mention of 2020 in the proxy statement comes in discussion of equity plans. It is frankly hard to see how this mistake could be inadvertent.

Pay for performance plans are meaningless without confidence that they will be honored. The disclosure in the proxy statement is not a signed contract but if it is not something shareholders can rely on it is entirely meaningless.

Shareholder Proposal

Finally, a shareholder proposal filed by the Organization United for Respect has filed a proposal at WalMart calling for the company to prepare a report “demonstrating the company does not have any racial or ethnic pay gaps.” The shareholder has filed a non-exempt solicitation with the SEC detailing further why taking a proactive step toward closing pay gaps “could reduce risks, promote inclusion, and demonstrate a sound approach to an issue of concern in the retail sector.”

Rosanna Weaver