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Graef Crystal is a columnist for Bloomberg News. The opinions expressed are his own.
Costco-Wal-Mart Pay -- Don't Discount Difference: Graef Crystal
Aug. 24 (Bloomberg) -- Costco Wholesale Corp. and Wal-Mart Stores Inc. both offer low-priced goods, yet when it comes to paying their employees, there is a difference in dollars and cents that starts with hourly workers and goes to the top.
Costco, the fourth-largest U.S. retailer, pays fulltime employees an average hourly wage of $17; Wal-Mart, the world's largest retailer, pays $9.68.
As for their CEOs, total 2004 pay for James Sinegal of the Issaquah, Washington-based Costco was $2.7 million; for H. Lee Scott of the Bentonville, Arkansas, Wal-Mart it was $17.9 million.
To provide a more solid basis of comparison with the pay of other companies, compensation in the remainder of this article centers, not on that 2004 figure but on average pay over three years. That's because at some companies long-term incentive grants are made every two or three years, not each year. Hence, three-year average pay is generally more representative than that for a single year.
Here is each CEO's three-year average pay for four different types of compensation. The three-year period for Costco ended Aug. 31, 2004; for Wal-Mart it ended Jan. 31, 2005.
(Total pay includes base salary; annual bonus; my estimate of the present value at grant of options granted during the three- year period based on the use of the Black-Scholes model; the value at grant of free-share awards made during the three-year period; payouts under other long-term incentive plans; and miscellaneous compensation. Pay data were obtained from Aon Consulting's eComp database.)
Three-Year Average Pay
Costco Wal-Mart Form of Pay (000) (000) Salary $350 $1,192 Bonus $67 $3,829 Other Pay ex Option PV* $25 $9,223 Option PV* $2,098 $8,485 Total Pay $2,540 $22,729 * Option Present Value
You would, of course, expect Wal-Mart to pay its CEO more than Costco, given the huge disparity in the size of the two companies. Wal-Mart's 2004 net sales were $285.2 billion, while those of Costco were $48.1 billion.
To calibrate for these differences, I compared the two CEOs with 500 other U.S. chief executives, all of whom ran companies with market caps of $3 billion or more as of April 2005. Multiple regression analysis was used to determine a ``going rate'' for each CEO for the 2002-2004 period, taking into account as many as three factors that were applicable to the particular form of compensation being studied: the size of the company, as measured by its 2004 net sales; the company's three-year weighted average total return; and the ratio of option present values to total pay. (The last-mentioned factor can be considered a proxy for the risk embedded in the CEO's pay package, given that options are generally the most risky form of executive pay.)
Compared With Others
Here's how the two CEOs came out compared with the 500 other U.S. CEOs:
Percent Above/ Percent Above/ Form of (Below) Market (Below) Market Pay Costco Wal-Mart Salary -73% -35% Salary plus Bonus -90% -25% Total ex Option PV -95% -4% Total -89% 0%
Though Scott can't be considered overpaid given the huge size of his company, Sinegal, in contrast, is wildly underpaid.
A further example of the differences in pay culture between the two companies can be found in studying the stock option grants made to the two CEOs as a percentage of all option grants made during the three-year period to all employees.
Sinegal received an average of 1.88 percent of the total grants made to all employees, while Scott chewed up a much higher 4 percent.
And that difference is even larger than it looks, because Scott received a second-form of long-term incentive pay: free share grants worth an average of $8.7 million a year during the three-year period. Sinegal didn't receive any free-share grants.
So Costco pays its fulltime workers much more than Wal-Mart and its CEO much less than Wal-Mart -- but also much less than when Costco is compared with companies of similar size, performance and risk characteristics.
Sinegal's Performance
Now if money really motivates executive performance, you would expect to see Scott lapping the field over Sinegal in total returns to investors. Just the opposite has occurred.
Scott became CEO of Wal-Mart on Jan. 14, 2000. Measuring from Jan. 13, 2000, to the market close this Aug. 19, Wal-Mart's cumulative total return was negative 25.5 percent. That was considerably lower than the negative 8.2 percent cumulative return on the Standard & Poor's 500 Index for the same period.
As for Costco, its cumulative return was negative 5.4 percent, relatively more favorable than that of both Wal-Mart and the S&P 500.
Viewed over Sinegal's entire tenure, which stretches back to sometime in August 1988, and measuring from July 29, 1988, through the close on this Aug. 19, Costco's total return was 10.6 percent a year versus the 11.7 percent a year return on the S&P 500 Index.
The Scorecard
As for Wal-Mart, its total return during the same long period was a much higher 16 percent a year. That higher performance, however, was achieved solely when Scott's predecessor, David Glass, was in charge.
It is worth noting that in his last full year as CEO (the fiscal year ended Jan. 31, 1999), Glass's total pay was $9.1 million. That compares with Scott's average total pay for the three years ended Jan. 31, 2005, of $22.7 million a year.
So here's the scorecard during the overlapping tenure of the two CEOs. For Costco, the employees won. The shareholders also won in the sense that, during the period covered by Scott's tenure, Costco's total return, though negative, was better than that of the S&P 500 and much better than Wal-Mart's. But Sinegal lost. For Wal-Mart, the employees lost, the shareholders lost and Scott won.
If you're Scott, you like that outcome.
Last Updated: August 24, 2005 00:04 EDT
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