Please ensure Javascript is enabled for purposes of website accessibility

The One Way Ron Johnson Has Helped J.C. Penney

By Adam Levine-Weinberg - Apr 8, 2013 at 4:16PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

J.C. Penney has performed poorly during Johnson's time as CEO. However, you can't say he's been overpaid -- on a net basis, he hasn't been paid at all!

J.C. Penney's (JCPN.Q) executive compensation has recently come into the spotlight, following the company's proxy filing last week. Various news outlets reported that CEO Ron Johnson had taken a massive 97% pay cut in 2012, compared to the previous year. Some observers commented that the pay cut signaled good judgment on the part of J.C. Penney's board, in light of the company's terrible performance last year. Here at The Motley Fool, we pointed out that Johnson's reported 2011 compensation of $53.3 millionis a bit of an exaggeration: Most of that was a stock grant designed to replace Apple stock options that Johnson had to give up in order to take the J.C. Penney job.

What has been overlooked by most media outlets is that -- on a net basis -- Ron Johnson hasn't really been paid at all by J.C. Penney! When Johnson decided to take the CEO job at the retailer, he invested $50 million of his own money in the company. That's more than the present value of the compensation he has received from J.C. Penney since he started working there a year and a half ago.

How is that possible?
When Johnson started work at J.C. Penney, he received approximately 1.66 million restricted stock units. RSUs are essentially shares of stock that cannot be sold until after a certain date; in Johnson's case, Jan. 27, 2012. Based on J.C. Penney's closing stock price of $31.71 on the effective date of the RSU grant (Nov. 1, 2011), the award was worth $52.7 million. However, J.C. Penney stock has dropped by more than 50% since then; based on last Friday's $15.45 closing price, the value of 1.66 million shares is approximately $25.7 million.

Johnson has also received cash compensation and benefits from J.C. Penney. In his first three months on the job, this totaled approximately $625,000. In fiscal year 2012 (the period ending in February 2013), Johnson earned $1.9 million in total compensation. Thus, as of Feb. 2, Johnson had earned slightly more than $2.5 million in cash and benefits in his tenure at J.C. Penney, along with 1.66 million shares of J.C. Penney stock (worth $25.7 million today).

On the other hand, Ron Johnson paid J.C. Penney $50 million cash when he accepted the job, in return for warrants that allow him to purchase more than 7 million shares of J.C. Penney stock for $29.92. $50 million was the fair value of the warrants at the time they were issued, but after J.C. Penney's recent poor performance, they have lost most of their value. Unless J.C. Penney's stock price rises above $29.92 before the warrants expire in 2018, Johnson will get nothing for the $50 million he invested in J.C. Penney.

Totaling it up
J.C. Penney has paid Ron Johnson approximately $2.5 million in cash and other compensation, and granted him 1.66 million shares of stock, which would be worth approximately $25.7 million based on the stock's recent trading price. However, all of this compensation is worth much less than the $50 million Johnson paid to J.C. Penney back in 2011 to acquire his warrants. Unless J.C. Penney makes a big comeback in the next five years, Ron Johnson will have actually paid for the privilege to work there. Maybe J.C. Penney shareholders are finding that "You get what you pay for!"

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

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

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.