Ethics and Economics
The amount of employee compensation and benefits has provided fodder for controversial debates on both ends of the pay scale. On the lower end, retail corporations repeatedly have come under fire for poorly compensating hourly employees.
A bill that would raise the minimum hourly wage to $7.25 was initially rejected by the U.S. Senate because it did not include tax incentives for small businesses. Debate over the proposed minimum-wage increase continues, although 30 U.S. state governments already enforce minimum-wage laws that are significantly above the federal requirement of $5.15 per hour and the minimum hourly wage is above $7.00 in 12 states.
According to Catherine Fox-Simpson, tax partner with BDO Seidman’s Retail and Consumer Products Practice based in Dallas, raising the minimum wage without tax incentives would have been very detrimental for small retailers. “The Senate’s decision sent the message that any wage increase should be partnered with tax incentives, and I expect these incentives will likely be leasehold-improvement based,” she said.
Although tax incentives are important, Fox-Simpson suggested they are a secondary concern for most retailers. The real issue is offering affordable yet competitive benefits that will enable retailers to attract and retain employees. “Retailers are increasingly creative with employee benefits,” stated Fox-Simpson. “One of the most popular trends is a modified work day, which caters to mothers who want to work flexible hours when their children are in school.”
Another popular employee benefit is gift-card incentives. Employees who do an exceptional job or who are recognized by customers for having provided outstanding service receive bonuses in the form of gift cards.
Pump It Up, based in Pleasanton, Calif., has indoor inflatable play arenas around the country that specialize in parties for young children and typically employ teenage hosts. At the Wake Forest, N.C., location, employees typically earn $8 to $10 an hour in wages and tips. Additionally, employees are motivated through a points system that awards incentives, such as popular Nano iPods, based on customer-evaluation scorecards.
When an employee incentive directly impacts the success of the business, it is not uncommon to see benefits extend to hourly and teenage workers. However, Fox-Simpson said, “Benefits are typically reserved for older, more experienced employees—not the 16- or 17-year-old clerk working in a store.”
Executive compensation: Recently the media spotlight has focused on the salaries and benefits paid to retail executives, with Robert Nardelli, former CEO of The Home Depot, Atlanta, among the most scrutinized.
“What draws public attention is when a company’s stock continues to decline but an executive’s compensation continues to go up,” stated Fox-Simpson. “Executive compensation is scrutinized in every industry, but because retail companies are universally known to the public, they [retail executives] are perhaps held to an even higher standard.”
Despite growing public awareness, there are no industry standards on executive earnings, and ethics are seldom factored into the economics of compensation. “Business ethics should enter into every financial discussion,” said Fox-Simpson. “There is increasing education on the topic. Many states require public accountants to complete classes in ethics before they can be certified.”
Two of the hottest trends involve questionable practices with stock options. Backdating stock options, which could enable the holder of stock to reap higher returns, is not illegal. However, if the practice is not accurately and fully disclosed, it breaches accounting laws. Spring-loading stock options, which positions the holder to exercise options at a favorable date when the stock price is low, poses similar concerns.
Home Depot Projects Lower Profit in 2007
Atlanta, The Home Depot Inc. said Wednesday it will pump $2.2 billion into improving its business this year even as it expects lower earnings and slim sales growth. Home Depot said that for fiscal 2007 it expects sales growth in the range of flat to an increase of 2%, a decline in comp-store sales in the middle single digit percentages and an earnings per share decline of 4% to 9%.
Including the effect of a 53rd week in its fiscal year, consolidated sales are expected to increase by 1% to 2%, and earnings per share are expected to decline by 3% to 8%, Home Depot said.
CEO Frank Blake told investors at Wednesday’s conference that like last year, “2007 also will be a difficult year.” But he said it will be a year of focus on Home Depot’s priorities and a year with “hopefully less noise.”
The “noise” was apparently a reference to the investor furor over former CEO Bob Nardelli’s hefty compensation in light of the company’s lagging stock price. Nardelli resigned in early January after six years at the helm of the company. He took with him a severance package valued at $210 million.
To improve its business, Home Depot said it will invest $2.2 billion this fiscal year in key priorities, including the opening of 115 stores. The investment includes $1.6 billion in capital spending and $600 million in expense.
Home Depot said it will recruit master trade specialists, simplify its staffing model, use more technology to aid customer service, and redesign employee compensation and reward plans. It also will invest in new merchandise and review its pricing strategies. Additionally, the chain will spend money on customer loyalty programs, direct-ship programs, credit programs and other specialty sales initiatives.
Federated Plans Name Change
New York City, Federated Department Stores on Tuesday said it would ask shareholders to approve changing the company’s corporate name to Macy’s Group Inc. A vote to amend the corporation’s charter to accommodate the new name will be held in conjunction with Federated’s annual meeting on May 18. If approved, the company will be known as Macy’s Group Inc., effective June 1. The move comes on the heels of the company changing most of its store nameplates to Macy’s.
“Macy’s Group is the appropriate name for our company, given that about 90% of our sales involve the Macy’s brand. That said, Bloomingdale’s is—and will remain—a very important part of our company,” said Terry J. Lundgren, Federated’s chief executive. Federated Department Stores also said stronger sales at established stores and lower costs drove a 5% rise in fourth-quarter earnings. For the quarter ended Feb. 3, net income rose to $733 million from $699 million the prior-year period. Sales fell 4% to $9.16 billion from $9.57 billion, as the company shuttered 80 “duplicative” store locations. Comp-store sales rose 6.1% in the quarter.
During the quarter, Federated lowered its selling, general and administrative costs 11% to $2.31 billion.
The company also announced a $4 billion increase to its stock buyback program and said it will immediately repurchase 45 million shares for $2 billion under the plan.