Money the executive management team to a common

Money Do Not Grow on Trees so why should CEO
Compensation

Tijuana Strozer

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Troy University

Abstract

The old saying money does not grow on trees, literally
means that money does not grow on trees. In this paper, I will analyze the
executive compensation program of Dollar Tree and its interpretation of
compensation terms, SEC Regulation S-K, Item 402 – Executive Compensation, and
disclosure requirements.  The purpose is
to show if compensation plans are excessive or appropriate for this
organization as it relates to Chief Executive Officer. This paper will also
examine whether the principal objectives of Dollar Tree compensation policies
is consistent with aligning executive pay with shareholders’ interests; provide
executive pay that is competitive amongst their peer group; recognize
individual initiative and achievements while attracting, motivating and
retaining highly qualified executives; and unify the executive management team
to a common objective. By utilizing the principles compensation analysis with
the data, the following questions will be answered.

 

 

 

 

 

 

 

 

 

 

 

Money do not Grow on
Trees so why should CEO Compensation

Have you ever heard the old saying that money does not
grow on trees?  Well, executive
compensation does not either. Executive compensation is a very important thing
to consider when evaluating a business opportunity. CEO’s compensation has
become an issue in today’s business society because executives who are
improperly compensated do not have the incentive to perform in the best
interest of shareholders, which as a result can be costly for its shareholders.
Since CEO’s did not compensate the government, the government introduce a new
bill called the Dodd-Frank Wall Street Reform and the Consumer Protection Act
of 2010, which made companies show proof of their annual total compensation
based on the medium of their employees (SEC, 2016). Although new rules and regulations
have made executive compensation much clearer these days in company filings,
many investors remain clueless as to how to find and read these important
reports. 

Background Objectives  

     Dollar
Tree, Inc. is the world’s leading operator of $1 price-point variety stores
(Dollar Tree, 2017).  A Fortune 200
Company, Dollar Tree has served North America for more than 30 years. The
principal objectives of Dollar Tree compensation policies consist of aligning executive
pay with shareholders’ interests; provide executive pay that is competitive
amongst their peer group; recognize individual initiative and achievements;
attract, motivate and retain highly qualified executives; and unite the
executive management team to a common objective (Dollar Tree, 2017). To make
sure that the organization is transparent in how executives are compensated; a
compensation committee should be in place for approving compensation packages
in support of the shareholders best interest. Dollar Tree has demonstrated a
long-standing commitment to responsible corporate governance and to delivering
value for our long-term shareholders (Dollar Tree, 2017). The compensation
committee performs three duties such as; review consultants’; alternate
recommendations for compensation packages, and discuss the assets and
liabilities of their recommendation; based on those recommendations presented
the 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 Commission
ruling and updates to the Dodd-Frank Act these changes help clear up any
discrepancies with compensation. It should furthermore take in consideration
the performance metrics, both qualitative and quantitative too. Utilizing
quantitative 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. With
the implication of qualitative metrics items such items as community relations,
crisis response, employee development and relations, ethics and a culture of
integrity, leadership, legal compliance, product quality, succession planning,
and workforce diversity can also help too.

     Dollar Tree
Chief Executive Officer Bob Sasser made $10,582,038 in total compensation in
2016 (Dollar Tree, 2017). Of this amount
$1,680,769 was received as a salary, $2,288,489 was received as a bonus, $0 was
received in stock options, $6,499,865 was awarded as stock and $112,915 came
from other types of compensation. This information is according to proxy
statements filed for the 2016 fiscal year (Salary.com, 2017).

Performance
Assessed   

 According to
Miller at SHRM, “CEOs and corporate directors don’t always see eye to eye on
how to measure executive performance, even directors give CEOs considerable
credit for corporate outcomes, as reported in CEOs and Directors on Pay: 2016
Survey on CEO Compensation” (Miller, 2016). Most of the Board Directors at
Dollar Tree is comprised of independent directors who regularly reviews the
Company’s governance practices to maintain an open dialogue with shareholders; Dollar
Tree 2016 Annual Report 5 on governance-related matters (Dollar Tree, 2017). To
ensure transparency, the board of director’s conduct reviews of the executive
compensation program every year. They also periodically conduct an in-depth
market analysis of executive compensation to determines if it is necessary to
ensure that the compensation programs are aligned with company objectives too.

 In setting
performance goals, they look beyond short-term market value changes and focus
on metrics related to long-term shareholder value creation. The executive
compensation program consists of three principal components: base salary,
annual bonus incentives, and long-term incentives. After reviewing the plan, I
feel that compensation committee considers these components individually and
review the overall distribution between them. They do not target specific
allocation percentages or amounts for each person. When the primary objective
of an executive compensation program is to better enable strategy execution
through incentives, proxy advisory policies, and external pressures should be
secondary considerations (Swinford, 2014). A pay-for-performance policy for
their executive officers balances each executive’s total compensation between
cash and non-cash, and current and long-term components.

CEO’s Total
Compensation for the most recent year.

     According to
the survey of CEOs and directors of Fortune 500 companies by Stanford
University’s Rock Center for Corporate Governance and Chicago-based executive
search firm Heidrick & Struggles, corporate leaders do not believe that
CEOs are overpaid but others disagree based on a companion report from
Stanford’s Rock Center, as SHRM Online recently reported (Miller, 2016). For
2016, Dollar Tree incentive bonuses were targeted at 140% of base salary for
the Chief Executive. For an executive to receive any bonus, they must achieve
at least eighty-five percent of the operating income target. Once they have
reached the target amount of eighty-five percent, then they receive their
portion 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 Enterprise
President, one-hundred percent of base salary for the newly appointed President
and Chief Operating Officer of Family Dollar, and 70% of base salary for all
other named executive officers”. “Of that amount, eighty-five percent was
linked to a specified U.S. operating income targeted at fifteen percent to
individual performance.”

CEO’s compensation is
“at risk”.

Executive compensation should be closely aligned with
the long-term interests of shareholders and with corporate goals and
strategies. It should include significant performance-based criteria related to
long-term shareholder value and should reflect upside potential and downside
risk. Executive compensation should directly link the interests of executive
officers, both individually and as a team, to the long-term interests of
shareholders. However, the Dodd-Frank Act requires the companies that trade stock
on public exchanges must comply with four major requirements that consist of
periodic “Say on Pay”,  independence
requirements for the compensation committees members and advisors as it relates
to compensation consultant and legal counsel, the disclosure of information on
how executive would benefit from the golden parachute arrangement and a
provision that require companies to report the ratio of CEO compensation of its
employees SEC filing. The SEC filing requires that the executive compensation
disclosure must be met.  It was further
enhanced by the Wall Street Reform and Consumer act of 2010 by President Barack
Obama to create transparency of the executive compensation practices. The “Say
and Pay” provision gives the shareholder the right to vote yes or but no on
executives’ proposals that are contained in the proxy statement. Although the
vote is nonbinding it alerts the board of directors of possible issues about
the structure of the executive compensation packages.  The SEC adopted this rule in August 2015, to
provide companies with flexibility in calculating pay ratio for identifying its
median employees and employee’s compensations (Martocchio, 2017).

 Reviewing the
June 2016 annual shareholders’ meeting notes, Dollar Tree provided its
shareholders with an advisory vote to approve the compensation of the named
executive officers. They received an overwhelming support of 98% for its Say on
Pay proposal who believed that Say on Pay is an important means by which
shareholders expressed their views regarding the Company’s executive
compensation and has decided to hold a Say on Pay advisory vote on an annual
basis (Dollar Tree, 2017). The right CEO who can grow the business will
only be attracted to an organization that has rewarding compensation package. Furthermore,
the board of directors must acknowledged and report to shareholders and hold the
CEO accountable if they are not performing competently to achieve profits in
this case they do.

Comparisons of
executive pay with Total Shareholder Return (TSR) as an indicator of “fairness”
in executive pay.

The primary reason for using total shareholder return
metrics in long-term awards is to determine weighted metrics and to incorporate
modifiers or payout limiters. Because long-term performance plan design is
always evolving, the proposed pay-for-performance disclosure regulations have
put added focus on the link between pay and performance. It will closely align
the executive compensation with the long-term interests of shareholder and with
the corporate goal and strategies. 
However, according to David Smith (2015), this pressure may only become
more intense with the SEC’s proposed rules to mandate disclosure of
pay-for-performance through the TSR lens. 
Many companies feel the need for an incentive program that aligns well
with the proxy advisory policies that use TSR to measure the CEO
pay-for-performance relationship (David N. Swinford, 2014). To Dollar Tree
advantage, by using this approach satisfies external pressures and aligns with
market norms. According to the survey of CEOs and directors of Fortune 500
companies by Stanford University’s Rock Center for Corporate Governance and
Chicago-based executive search firm Heidrick & Struggles, corporate leaders
do not believe that CEOs are overpaid but others disagree based on a companion
report 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 it
comes to deliberating salary in a negotiation. It furthers to attract, retain,
and motivate employees too. For companies in the private sector, this
philosophy requires a competitive pay philosophy while others in the public
sector, it requires a well-rounded philosophy, with a focus on benefits and
work-life. While they do not offer executives a pension plan, each executive
may elect to defer a portion of his or her annual cash compensation into our
Non-Qualified Deferred Compensation Plan, which is further described in the
Non-Qualified Deferred Compensation Table and narrative disclosure following
this discussion (Dollar Tree, 2017)  In
some countries the ratio of top executive compensation to median worker pay is
constrained by culture and a sense of duty while others view market scenario
and the price of a star CEO matches the pricing of star athletes (Reh, 2017).

Conclusion

What I have learned from this experience is that top
executive, shareholders, and CEO play a huge role in any organization. Top
Executive role are ultimately accountable for making sure that development and
the deployment of a strategy is done. They are accountable to the board of
directors for creating and sustaining a healthy growing business with effective
results. The shareholders want profitable growth and every increasing share
price of dividend payments. While the CEO compensation continues to a be a question
of whether he or she is worth all that money or not creates uncertain amongst
compensation conversations. I also think that this is a challenging and
controversial issue with no easy resolution for many situations. the
Compensation specialist are responsible for researching, establishing, and
maintaining compensation pay. Having basic knowledge of researching and
comprehending current and upcoming competitive markets for employee pay and
benefits is the key to success. Finding ways to ensure that pay rates are fair
and equitable is crucial to an organization reputation fairness. I still
believe that some compensation plans are excessive especially when it compares
to compensation for low wage jobs.  In my
opinion, wage these days offered by the public sector
and key businesses should reflect a wage rate required to meet minimum
standards of living.