What "Performance-Based Pay" Means in the C-Suite

In yesterday's New York Times, Gretchen Morgenson took a look at Walmart's proxy filing to see how it's paying its executives.

When measuring top executives' performance for compensation purposes, Walmart makes various "adjustments" to its financial results, making those look better than in its audited financial statements. And better results means more pay (for the top).

Walmart claims that it makes these "adjustments" to eliminate stand-alone occurrences in order to base compensation on "comparable" years, but they, unsurprisingly, take a lot of liberties.

This year, the company included far more adjustments than in recent years. The impact of 11 “significant” items — including store closings, delays in store openings and the sale of operations — was eliminated from its results. In each of the four previous years, the number of adjustments never exceeded five.

The current adjustments essentially make the costs or lost income disappear when figuring performance pay.

Consider the case of William S. Simon, president and C.E.O. of Walmart’s United States unit. Under Walmart’s pay plan, he would receive some incentive pay if sales grew more than 2 percent.

The trouble was, Walmart’s United States sales rose only 1.8 percent in fiscal 2014. That meant Mr. Simon would miss his threshold.

Enter the adjustments.

After adjusting for certain items relating to the company’s sales, the Walmart unit eked out a growth rate of 2.03 percent in 2014. On the strength of that “adjusted” performance, Mr. Simon received $1.5 million, the proxy noted. His total compensation was $13 million last year.

What adjustments helped Mr. Simon clear the bar? One action that the company took was to eliminate the decline in its United States sales that occurred after the government cut food stamp benefits — formally known as the Supplemental Nutrition and Assistance Program, or SNAP — by 5 percent last November.

That reduction in benefits hurt Walmart’s sales, the company acknowledged, because many customers use food stamps in its stores.

But for executive-pay purposes, that sales decline never happened. And that meant a bigger payday for Mr. Simon.
…
There’s more. When figuring cash incentive pay, the company requires performance to exceed another threshold relating to its operating income. The bar is low — the company’s total operating income could decline by 1.5 percent, the proxy said, and executives would still earn a minimum cash incentive payout.

Again, the adjustments provided a crucial lift. According to the company’s annual financial filing, its actual operating income fell by 3.1 percent. But after making its adjustments — presto chango — the growth rate became a positive 1 percent.

Six of Walmart’s top executives received a total of $8.42 million in cash incentive payments for 2014, the proxy said. Mr. Tovar declined to specify how much of that was generated by the adjustments.

This contrasts with Walmart's own abysmal pay of most of its store employees. However, it called to mind another revealing contrast. 

You see, the Walton family is really big on performance-based pay somewhere else:

Although Walmart opened its first two stores in the nation’s capital just last December after a protracted battle over the retailer’s wages, the Walton Family Foundation has played a role in steering the direction of public education in the city for more than a decade. Since 2000, the foundation has invested more than $80 million here, not only in charter schools but also in support of taxpayer-funded vouchers for students to attend private schools. It poured millions into a controversial overhaul of tenure, the implementation of stricter teacher evaluation systems and the introduction of performance pay in the district’s public schools.

(emphasis added) 

Something tells me those teachers aren't getting so many "adjustments."