Reference no: EM13476397

By any measure, the chief executive officer of Wal-Mart Stores, Mike Duke, has a huge job. In the highly competitive retail industry, Wal-Mart operates more than 10,000 stores in more than two dozen countries, generating sales in the hundreds of billions of dollars. For that responsibility, Duke is highly paid. In 2011, he received a base salary of $1.3 million, stock awards valued at $13.1 million, and a cash bonus of $2.9 million. Duke's salary and stock awards were each 3% larger than in the previous year, but his bonus was 25% smaller because the company failed to meet goals for operating income. His total compensation of $18.1 million made Duke the 82nd-highest paid chief executive in the United States, according to Forbes magazine.

Another change that took place in Duke's compensation was in the measures used for setting his incentive pay. In the past, Wal-Mart used a metric common to retailers: same-store sales, meaning sales volume at stores that have been open for one year or longer. By looking at same-stores sales, a company can determine whether its activities are making its stores more successful over time. Wal-Mart, however, decided to base Duke's incentive pay on the total sales for the entire company. The change came after Wal-Mart's same-store sales had been falling for two years as recession-strained consumers switched to dollar stores or put off purchases altogether. In its official explanation of the change, Wal-Mart said it would "align our performance share goals more closely with our evolving business strategy, which emphasizes productive growth, leverage and returns." Several years earlier, in contrast, Wal-Mart had said it measured same-store sales because that metric "is a key driver of shareholder returns" and investors view it "as an important measure of performance in the retail industry."

The change from same-stores sales to total sales as the basis for incentive pay followed another change in performance targets. Two years earlier, the company switched the time frame for measuring performance. In the past, Wal-Mart executives had to meet three-year goals before receiving incentives. Beginning in 2009, they began receiving their incentive pay for meeting one-year goals. The company said the change would make the goals more current and realistic.

Lower in the corporate hierarchy, Wal-Mart has made very different decisions about compensation. The average wage for an hourly Wal-Mart employee in the United $12.40 per hour. An average employee with a fulltime schedule (many work part-time) would earn about $25,800 per year. Like Duke, wage earners at Wal-Mart are eligible for incentive pay, but the scale of the incentive pay is far smaller.

Under the company's founder, Sam Walton, Wal-Mart set up a profit-sharing program, which Walton in his autobiography called "the carrot that's kept Walmart headed forward" These payments have represented up to 4% of employees' pay. The money was deposited in a fund that employees could cash in when they retired. In 2010, Wal-Mart paid its employees $1.1 billion in profit sharing and contributions to employees' 401(k) retirement funds. However, that was the last year for the program. After 39 years, beginning in 2011, lower-level employees are no longer eligible for profit sharing. The company will instead increase its spending on quarterly and annual bonuses and medical insurance, and it will continue matching employees' contributions to their 401(k) plans, up to 6% of their pay. A company spokesperson noted that employees would be able to spend their bonuses immediately, rather than waiting for their retirement, as they did with the profit sharing.

Questions:

1. Compare the impact of incentive pay on the total compensation of Wal-Mart's CEO and the company's average workers. Does the difference in the way pay is structured at these two levels make business sense? Why or why not?

2. How do you think Wal-Mart's store workers would judge the equity of the difference between their total compensation and Mike Duke's total compensation? Do you think the difference would motivate them to work hard to move into management positions? Why or why not?

3. What, if any, changes would you recommend that Wal-Mart make to its policies for incentive pay so that its compensation better supports its strategy?