Money Do Not Grow on Trees so why should CEO CompensationTijuana StrozerTroy University AbstractThe old saying money does not grow on trees, literallymeans that money does not grow on trees. In this paper, I will analyze theexecutive compensation program of Dollar Tree and its interpretation ofcompensation terms, SEC Regulation S-K, Item 402 – Executive Compensation, anddisclosure requirements. The purpose isto show if compensation plans are excessive or appropriate for thisorganization as it relates to Chief Executive Officer.
This paper will alsoexamine whether the principal objectives of Dollar Tree compensation policiesis consistent with aligning executive pay with shareholders’ interests; provideexecutive pay that is competitive amongst their peer group; recognizeindividual initiative and achievements while attracting, motivating andretaining highly qualified executives; and unify the executive management teamto a common objective. By utilizing the principles compensation analysis withthe data, the following questions will be answered. Money do not Grow onTrees so why should CEO CompensationHave you ever heard the old saying that money does notgrow on trees? Well, executivecompensation does not either. Executive compensation is a very important thingto consider when evaluating a business opportunity.
CEO’s compensation hasbecome an issue in today’s business society because executives who areimproperly compensated do not have the incentive to perform in the bestinterest of shareholders, which as a result can be costly for its shareholders.Since CEO’s did not compensate the government, the government introduce a newbill called the Dodd-Frank Wall Street Reform and the Consumer Protection Actof 2010, which made companies show proof of their annual total compensationbased on the medium of their employees (SEC, 2016). Although new rules and regulationshave made executive compensation much clearer these days in company filings,many investors remain clueless as to how to find and read these importantreports. Background Objectives DollarTree, Inc. is the world’s leading operator of $1 price-point variety stores(Dollar Tree, 2017). A Fortune 200Company, Dollar Tree has served North America for more than 30 years.
Theprincipal objectives of Dollar Tree compensation policies consist of aligning executivepay with shareholders’ interests; provide executive pay that is competitiveamongst their peer group; recognize individual initiative and achievements;attract, motivate and retain highly qualified executives; and unite theexecutive management team to a common objective (Dollar Tree, 2017). To makesure that the organization is transparent in how executives are compensated; acompensation committee should be in place for approving compensation packagesin support of the shareholders best interest. Dollar Tree has demonstrated along-standing commitment to responsible corporate governance and to deliveringvalue for our long-term shareholders (Dollar Tree, 2017). The compensationcommittee performs three duties such as; review consultants’; alternaterecommendations for compensation packages, and discuss the assets andliabilities of their recommendation; based on those recommendations presentedthe proposal is then sent to the board of directors for its consideration(Martocchio, p. 264). Due to the recent changes in the Securities and Exchange Commissionruling and updates to the Dodd-Frank Act these changes help clear up anydiscrepancies with compensation. It should furthermore take in considerationthe performance metrics, both qualitative and quantitative too.
Utilizingquantitative metrics such items as cash and debt management, cost containment,dividends and earnings per share, labor relations, margins, market share,mergers, and acquisitions, return on equity, revenue and profit growth. Withthe implication of qualitative metrics items such items as community relations,crisis response, employee development and relations, ethics and a culture ofintegrity, leadership, legal compliance, product quality, succession planning,and workforce diversity can also help too. Dollar TreeChief Executive Officer Bob Sasser made $10,582,038 in total compensation in2016 (Dollar Tree, 2017). Of this amount$1,680,769 was received as a salary, $2,288,489 was received as a bonus, $0 wasreceived in stock options, $6,499,865 was awarded as stock and $112,915 camefrom other types of compensation. This information is according to proxystatements filed for the 2016 fiscal year (Salary.com, 2017). PerformanceAssessed According toMiller at SHRM, “CEOs and corporate directors don’t always see eye to eye onhow to measure executive performance, even directors give CEOs considerablecredit for corporate outcomes, as reported in CEOs and Directors on Pay: 2016Survey on CEO Compensation” (Miller, 2016).
Most of the Board Directors atDollar Tree is comprised of independent directors who regularly reviews theCompany’s governance practices to maintain an open dialogue with shareholders; DollarTree 2016 Annual Report 5 on governance-related matters (Dollar Tree, 2017). Toensure transparency, the board of director’s conduct reviews of the executivecompensation program every year. They also periodically conduct an in-depthmarket analysis of executive compensation to determines if it is necessary toensure that the compensation programs are aligned with company objectives too.
In settingperformance goals, they look beyond short-term market value changes and focuson metrics related to long-term shareholder value creation. The executivecompensation program consists of three principal components: base salary,annual bonus incentives, and long-term incentives. After reviewing the plan, Ifeel that compensation committee considers these components individually andreview the overall distribution between them. They do not target specificallocation percentages or amounts for each person. When the primary objectiveof an executive compensation program is to better enable strategy executionthrough incentives, proxy advisory policies, and external pressures should besecondary considerations (Swinford, 2014). A pay-for-performance policy fortheir executive officers balances each executive’s total compensation betweencash and non-cash, and current and long-term components.
CEO’s TotalCompensation for the most recent year. According tothe survey of CEOs and directors of Fortune 500 companies by StanfordUniversity’s Rock Center for Corporate Governance and Chicago-based executivesearch firm Heidrick & Struggles, corporate leaders do not believe thatCEOs are overpaid but others disagree based on a companion report fromStanford’s Rock Center, as SHRM Online recently reported (Miller, 2016). For2016, Dollar Tree incentive bonuses were targeted at 140% of base salary forthe Chief Executive. For an executive to receive any bonus, they must achieveat least eighty-five percent of the operating income target. Once they havereached the target amount of eighty-five percent, then they receive theirportion of the bonus for the corporate performance component (Dollar Tree,2017).
The Dollar Tree (2017) annual proxy statement states on June 15, 2017,”officer had to make ninety percent of their base salary for the EnterprisePresident, one-hundred percent of base salary for the newly appointed Presidentand Chief Operating Officer of Family Dollar, and 70% of base salary for allother named executive officers”. “Of that amount, eighty-five percent waslinked to a specified U.S. operating income targeted at fifteen percent toindividual performance.” CEO’s compensation is”at risk”. Executive compensation should be closely aligned withthe long-term interests of shareholders and with corporate goals andstrategies. It should include significant performance-based criteria related tolong-term shareholder value and should reflect upside potential and downsiderisk. Executive compensation should directly link the interests of executiveofficers, both individually and as a team, to the long-term interests ofshareholders.
However, the Dodd-Frank Act requires the companies that trade stockon public exchanges must comply with four major requirements that consist ofperiodic “Say on Pay”, independencerequirements for the compensation committees members and advisors as it relatesto compensation consultant and legal counsel, the disclosure of information onhow executive would benefit from the golden parachute arrangement and aprovision that require companies to report the ratio of CEO compensation of itsemployees SEC filing. The SEC filing requires that the executive compensationdisclosure must be met. It was furtherenhanced by the Wall Street Reform and Consumer act of 2010 by President BarackObama to create transparency of the executive compensation practices.
The “Sayand Pay” provision gives the shareholder the right to vote yes or but no onexecutives’ proposals that are contained in the proxy statement. Although thevote is nonbinding it alerts the board of directors of possible issues aboutthe structure of the executive compensation packages. The SEC adopted this rule in August 2015, toprovide companies with flexibility in calculating pay ratio for identifying itsmedian employees and employee’s compensations (Martocchio, 2017).
Reviewing theJune 2016 annual shareholders’ meeting notes, Dollar Tree provided itsshareholders with an advisory vote to approve the compensation of the namedexecutive officers. They received an overwhelming support of 98% for its Say onPay proposal who believed that Say on Pay is an important means by whichshareholders expressed their views regarding the Company’s executivecompensation and has decided to hold a Say on Pay advisory vote on an annualbasis (Dollar Tree, 2017). The right CEO who can grow the business willonly be attracted to an organization that has rewarding compensation package. Furthermore,the board of directors must acknowledged and report to shareholders and hold theCEO accountable if they are not performing competently to achieve profits inthis case they do.
Comparisons ofexecutive pay with Total Shareholder Return (TSR) as an indicator of “fairness”in executive pay.The primary reason for using total shareholder returnmetrics in long-term awards is to determine weighted metrics and to incorporatemodifiers or payout limiters. Because long-term performance plan design isalways evolving, the proposed pay-for-performance disclosure regulations haveput added focus on the link between pay and performance. It will closely alignthe executive compensation with the long-term interests of shareholder and withthe corporate goal and strategies. However, according to David Smith (2015), this pressure may only becomemore intense with the SEC’s proposed rules to mandate disclosure ofpay-for-performance through the TSR lens.
Many companies feel the need for an incentive program that aligns wellwith the proxy advisory policies that use TSR to measure the CEOpay-for-performance relationship (David N. Swinford, 2014). To Dollar Treeadvantage, by using this approach satisfies external pressures and aligns withmarket norms. According to the survey of CEOs and directors of Fortune 500companies by Stanford University’s Rock Center for Corporate Governance andChicago-based executive search firm Heidrick & Struggles, corporate leadersdo not believe that CEOs are overpaid but others disagree based on a companionreport from Stanford’s Rock Center, as SHRM Online recently reported (Miller,2016). A pay philosophy is a company’s promise to how it values employees. When pay philosophy is consistent,performance goals give the company and the employee a frame of position when itcomes to deliberating salary in a negotiation.
It furthers to attract, retain,and motivate employees too. For companies in the private sector, thisphilosophy requires a competitive pay philosophy while others in the publicsector, it requires a well-rounded philosophy, with a focus on benefits andwork-life. While they do not offer executives a pension plan, each executivemay elect to defer a portion of his or her annual cash compensation into ourNon-Qualified Deferred Compensation Plan, which is further described in theNon-Qualified Deferred Compensation Table and narrative disclosure followingthis discussion (Dollar Tree, 2017) Insome countries the ratio of top executive compensation to median worker pay isconstrained by culture and a sense of duty while others view market scenarioand the price of a star CEO matches the pricing of star athletes (Reh, 2017). ConclusionWhat I have learned from this experience is that topexecutive, shareholders, and CEO play a huge role in any organization.
TopExecutive role are ultimately accountable for making sure that development andthe deployment of a strategy is done. They are accountable to the board ofdirectors for creating and sustaining a healthy growing business with effectiveresults. The shareholders want profitable growth and every increasing shareprice of dividend payments.
While the CEO compensation continues to a be a questionof whether he or she is worth all that money or not creates uncertain amongstcompensation conversations. I also think that this is a challenging andcontroversial issue with no easy resolution for many situations. theCompensation specialist are responsible for researching, establishing, andmaintaining compensation pay.
Having basic knowledge of researching andcomprehending current and upcoming competitive markets for employee pay andbenefits is the key to success. Finding ways to ensure that pay rates are fairand equitable is crucial to an organization reputation fairness. I stillbelieve that some compensation plans are excessive especially when it comparesto compensation for low wage jobs. In myopinion, wage these days offered by the public sectorand key businesses should reflect a wage rate required to meet minimumstandards of living.