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J.C. Penney's CEO Got Off Easy

By Andrew Marder - Apr 4, 2013 at 5:30PM

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Ron Johnson gets a pay "decrease," but is it overhyped?

In 2011, when J.C. Penney (JCPN.Q) hired Ron Johnson as CEO, it also paid him $53.3 million in total compensation. Last year, while Penney's stock fell 44%, he got paid $1.9 million. Much has been made of how Johnson is getting his just deserts and how the board is finally stepping up to say enough is enough, but the truth is a little less interesting. In part, Johnson's 2011 pay was reflective of his own investment in the company.

Give and take
In 2011, Johnson came into the CEO position with a vision and a history of success -- also, he brought $50 million with him. When Johnson was about to leave Apple, he was also about to come into $50 million in stock options. To just leave that all behind would be silly, so Penney had to offer him about $50 million in stock to make the transition make sense. Then, because he was an optimistic kind of guy, Johnson also agreed to invest $50 million in cash in Penney.

He bought those shares at around $6.90 and the stock is currently trading at $14.50, but he's not sitting on profit yet. If the stock is under $29.92 in six years, then he gets nothing.

So in that first year, Johnson lost $50 million in Apple stock, then got $50 million in J.C. Penney stock. Then he paid $50 million to buy more J.C. Penney stock. Just looking at what he got, it looks like he's up $50 million, but looking past that you can see that he actually gave up liquidity, and better stock. At this point in the story, Johnson is actually $50 million in the hole.

A firm slap on the wrist
So then 2012 happens, along with its couponless days and free-haircut nights, and suddenly everyone sees what a poor job Johnson has done. So yesterday it comes to light that in 2012 he only got $1.5 million and $400,000 in perks. Then the media runs out the $53.3 million that he "earned" in 2011, and suddenly it's a 97% pay cut. But that's not what's happening here.

Instead, Johnson is keeping his pay level, but not receiving the sorts of bonuses and options that traditionally bulk out the remuneration packages of the top CEOs, and which bulked out his pay in 2011. The board may not have taken a bold stand, but it's a stand nonetheless. In fact, Johnson should be thanking the board members for being so lenient given how other underperforming CEOs have been treated recently.

A harsher system
Compare the above to what Groupon's (GRPN -1.42%) board did last month. Like J.C. Penney, Groupon was struggling with revenue and punishing shareholders. Founder and CEO Andrew Mason wasn't making the cut, and the board let him loose. Mason saw it coming, and before the firing said, "Our stock is down about 80%, it would be weird if the board wasn't discussing whether I'm the right guy to do the job, it's their chief responsibility to ask that question."

That highlights the difference between a genuinely strong board, and a board that just looks good on paper. The strong board makes the difficult decisions because those are the right choices for the company. J.C. Penney could learn something from Groupon.

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J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
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