For the past couple years, J.C. Penney Company (NYSE: JCP) has been struggling to survive following the perfect storm of increased competition, a move toward online sales of clothing, and inept management decisions that severely disenfranchised its customer base. To the Foolish investor who has kept up-to-date with the company for a while, none of this should come as any surprise. However, there is one aspect of the company's fall from grace that some people may overlook which played a role in its monumental decline; rampant executive compensation.
While it is typically expected for directors and executives at a strong, thriving enterprise to receive high levels of compensation in exchange for their efforts to make the company in question run optimally, what about a company that has been driven into the ground? What level of compensation is justifiable here? Admittedly, the answer is subjective. However, by comparing the performance of J.C. Penney and two of its peers, and then setting their levels of executive compensation side-by-side, we can get a fair idea of whether or not their compensation policies are appropriate.
J.C. Penney's performance has been awful
To measure J.C. Penney's performance relative to its peers, I first have to pick out a couple of competitors to pit it against. The two I chose are Macy's (NYSE: M) and Kohl's (NYSE: KSS) because they are large retailers that compete directly with J.C. Penney. To analyze the performance of each company, I elected to look at two variables; revenue and net income.
(chart made by author with data from http://money.msn.com/)
Looking at the chart above which plots out the revenue for J.C. Penney, Macy's, and Kohl's from 2008 through 2012 (in billions), we can get a reasonable gauge of how each company has fared.
After dipping 5.6% in 2009, revenue for Macy's has grown in an almost linear fashion for a total revenue growth rate of 11.2% over the time horizon plotted. This is, arguably, a good trajectory for the company, but not as good as Kohl's which saw revenue increase every year for a cumulative growth rate of 17.6%. J.C. Penney, however, has been the least consistent as demonstrated by its 5% drop in 2009, followed by a 1.1% rise in 2010, and a subsequent drop of 2.8% in 2011. However, its greatest negative surprise was the 24.7% decrease which occurred in 2012.
As we can see here, J.C. Penney's performance has been, by far, the worst of the three in terms of revenue whereas Kohl's performance has been the best. However, just because revenue is a disappointment that doesn't mean that everything is terrible. Probably more significant than a company's revenue is its net income.
While Kohl's won the battle in terms of revenue growth, we can clearly see that when it comes to net income Macy's has seen the most improvement. Now, in all fairness, Macy's net loss of $4.8 billion in 2008 was due to a one-time impairment of $5.78 billion, but even removing that from the equation makes it the top dog. However, just like in the case of revenue, J.C. Penney comes out on the bottom with net income declining almost every year from $572 million in 2008 to -$985 million in 2012. Once again, investors at J.C. Penney are left losing out as a result.
Metrics say one thing but compensation says another
So, with all this out in the open, what does this mean for executive compensation? Surely, management would understand that the company has been in dire straits. They would take small compensation packages so that those proceeds that would otherwise go to management could be diverted to adding shareholder value, right? Wrong! Even as the company has all but fallen apart, top executives have continued to profit immensely from the company at the expense of the shareholders.
For instance, between 2011 and 2012, the period of time where the company was suffering the most, directors and executives continued to be rewarded handsomely. This was demonstrated by their total compensation of around $236 million over that time frame. Of that, $171 million went to officers of the company, while the remaining $65 million went to other executives below the officer level. Now, in all fairness, a vast majority of this compensation was in the form of stock awards, but it still seems egregious no matter how you stack it. Even so, this number comes out to about 9.3% of the company's current market capitalization.
Although not the largest aspect of compensation by any means, perhaps the most telling is the company's compensation of its board of directors. For 2012 alone, the company's board was awarded compensation of $2.25 million in aggregate. At Macy's, which has performed much better than J.C. Penney, we see 2012 director compensation come in at $2.11 million. Meanwhile, Kohl's, the fastest growing of the three, saw director compensation set at $2.45 million.
In essence, here we have a company that has, over the past five years, performed far worse than two of its peers. However, it has richly rewarded executives to the tune of nearly a quarter of a billion dollars, even as it has sought to raise over $800 million by selling shares at the expense of its shareholders. Furthermore, its directors, the very group of people charged by the shareholders to ensure that management is conducting its duties in their best interests, have been paid roughly in line with their significantly better peers. I don't know about you, but all this would leave me too perturbed to sleep soundly at night if I owned shares in the company.
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