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Going the Distance

Going the Distance

Troubled companies seek executives that can stay beyond the turnaround phase

Sam Martin has only been on the job as chief executive officer of A&P since July, but he has already lasted almost as long as his predecessor.

The Montvale, N.J.-based company, which has been lurching from one turnaround effort to another for several years, brought Martin in from OfficeMax in July following a five-month stint in the post by Ron Marshall, the former Pathmark Stores chief financial officer who had more recently been a CEO at Nash Finch and then Borders before joining A&P in February.

The sudden change had industry observers scratching their heads. Why did the company, which had recently taken on an investment from Ron Burkle's Yucaipa Cos., hire Marshall and then let him go after only a few months?

The change is a reflection of the difficulties retailers in turnaround mode face when they seek to bring in new talent to reverse the fortunes of companies in decline. They often must offer outsized pay and retention bonuses to attract top talent, even though the odds for success might be stacked against them.

The industry is riddled with failed turnaround efforts, and relatively few have succeeded in the long term. Pleasanton, Calif.-based Safeway is one example of a successful turnaround, after Steve Burd, who remains chairman and CEO, took over in the 1990s.

Other turnaround efforts are still works in progress, including an effort to revive Jacksonville, Fla.-based Winn-Dixie Stores under former Albertsons executive Peter Lynch, which has been showing signs of success.

Marshall's sudden departure from A&P, one industry observer noted, was “fairly typical” for a company seeking to turn itself around.

“Usually in cases of very short tenure, there is a philosophical difference,” the observer said. “Sometimes a new executive and a team comes in, and after they start to do a deep dive, and they say, ‘We think the plan should be X,’ but the board thinks the plan should be Y.

“It's fairly typical, and I would not think it is performance-related at all,” the observer said of the A&P move.

In a statement at the time of Martin's hiring, Christian Haub, executive chairman of A&P and a member of the Tengelmann family that also owns a significant stake in A&P, seemed to corroborate that, at least to the extent that Martin was a better fit for the turnaround strategy set by the company's investors.

“The board and the company's major shareholders, Tengelmann and Yucaipa, have been instrumental in developing what I believe is the right turnaround strategy for A&P,” Haub said at the time. “As we moved to the implementation and execution stage of this comprehensive operational and revenue-driven turnaround, the board determined that the company needed a leader at the helm with the skill set Sam Martin possesses. Sam is a proven, hands-on operational expert in the food retail industry. He has an ideal mix of food industry management experience encompassing operations, merchandising and supply chain.”

Whether A&P will go down in history as one of the industry's few successful turnaround efforts, or join the ranks of those many that have failed, remains to be seen, but A&P seems to believe Martin, 53 at the time of his hiring in July, can be successful in the long term.

The company has agreed to pay the former Wild Oats and OfficeMax executive a base salary of $1 million, with guaranteed severance of 12 months' pay, according to a filing with the Securities and Exchange Commission. Martin also could receive a target bonus equal to from one to two times his salary.

Although his contract, which extends through July 2013, includes opportunities for stock awards as well, the structure of his compensation reflects the risk he is taking by giving him a significant portion of his earnings in cash and guarantees, observers said.

“Many executives joining struggling companies won't take too much stock in the stock itself,” said Jose Tamez, managing partner in the Denver office of executive search firm Austin-Michael. “They realize that you can make all the stock promises you want, but 100% of zero is still zero.”

Companies know they need to offer so-called “combat pay” to recruit talented executives to troubled organizations, he explained.

“Along with that usually come some attractive compensation measures,” he said.

Bringing in an executive team — Martin filled his top posts quickly with industry veterans, including some from his most recent employer, OfficeMax — can also be expensive for a company in turnaround mode.

“To get somebody who would typically cost $200,000, it will cost you $240,000 to $250,000, roughly,” said Tamez. “For someone in that salary range, it will typically cost a company $40,000 to $50,000 more to get an executive to look at you.”

Among the executives brought in was Paul Hertz, age 40 at the time of his hire, who, as executive vice president of operations, will earn a base salary of $600,000 annually and a sign-on bonus of $250,000 — most of which was deferred until six months after hire. He also will be eligible for a target bonus.

About the same time, A&P brought on another young executive, Tom O'Boyle, 41, as executive vice president of marketing and merchandising. He will receive a base salary of $625,000 with an identical retention bonus.

Retention and Recruiting

Bill Reffett, managing partner at the Seattle office of executive search firm Preston Reffett, said retention bonuses might work as an incentive to retain executives at turnaround companies in the near term, but they have a limited effectiveness.

“Over the last couple of years, many turnaround supermarket retailers have put retention bonuses in place to offset the less than robust bonus payments made,” he said. “While this worked as a short-term strategy, it does not drive performance, create excitement or inspire the team. It is merely a pay-to-stay strategy that will eventually run its course.”

He noted that in the past year, companies have gotten very specific about the talent they are seeking.

“Retailers are strongly encouraging us to cast a broader net and to look at potential candidates from non-traditional sources,” he said. “While we have seen the base compensation for executives to rise slightly, we are seeing more emphasis on long-term incentive plans tied to performance.”

Gary Preston, managing partner at the Philadelphia office of Preston Reffett, noted that many CEOs in turnaround situations seek to bring in executives who they have experience working with.

“We see many new turnaround CEOs surround themselves with people they have worked with before,” he said. “This makes it difficult to attract an outsider who at the end of the day might be better suited for the situation.”

The formula for keeping great talent “has not changed much over the last decade,” he added. “Pay a competitive base salary and an achievable bonus opportunity, give your executives room to run, treat the group with respect and dignity, invest in growing the business and have a CEO that is as interested in the business tomorrow as they are today.”

Often, he said, a company's leadership can get caught up in short-term metrics such as daily product tracking, weekly sales and earnings reports, and what he described as “a quarter-to-quarter mentality.”

In that kind of environment, “the leadership gets focused on the tactical drivers and misses out on customer and product innovation,” he said.

In recruiting executives, it always helps to have a strong CEO in place, he pointed out.

“When we make the initial call to a potential executive we are recruiting, the good ones always ask more questions about the leadership team than they do the components of the compensation package,” he said. “We see time and time again very talented executives who will entertain a lateral move if the CEO is someone that is respected in the industry.”

Elaine Erickson, managing director in the New York office of Preston Reffett, agreed that beyond compensation considerations, “the best talent is closely examining the key leadership at the very top of organizations that are recruiting them.

“Where the CEO has been recycled from mediocre companies, executives are taking a pass,” she said. “This is one of the drivers that is causing some CEOs to bring in people that they have worked with before. It's a safer bet for them, but not necessarily a safer bet for the shareholders.”

Creative Incentives

Randy Ramirez, Northeast regional leader of the compensation and benefits practice at BDO, said incentive plans for executives at companies in turnaround mode should be creatively structured with non-traditional goals that go beyond traditional financial measurements like gains in sales and operating improvements.

“Companies that are in turnaround mode, especially retail and supermarkets companies, are much different than traditional companies,” he said. “Most companies, when they have everything in place — they have logistics and everything nailed down, they have identified their market share and they are streaming along — it is very easy to measure performance on a financial level.

“But for companies in turnaround mode, if they want to get the company back on the right track and get the right executives in place, then they need to have a thoughtful incentive program that's not purely based on financials.”

Often companies that are struggling need to make certain investments in the near term, he explained, and executives brought in for such situations should be given the flexibility to execute with long-term goals in mind.

“Sometimes the investments that need to be made in the first 12 months might not result in any measurable gain at the end of those first 12 months,” he explained.

“A thoughtful incentive program needs to communicate this very simple message to the executive group: ‘We are committed to you as a team to be able to turn this company around, and we are going to back you.’ That's the message it has to send.”

While some financial metrics will be important in structuring the incentive program for a retailer in turnaround mode, the retailer might be better served by incorporating other goals into the package as well, Ramirez explained.

As an example, he cited a retail client he is working with that is seeking to improve its distribution and logistics capabilities. Rather than structure incentives around growth targets in revenues and operating income, the company incorporated into its goals for executives an incentive to complete a $20 million bond sale in the next year.

“It should be more than just having a goal of reducing operating expenses by 20%,” he explained. “A thoughtful incentive program will have some financial incentives, but must also have thoughtful milestones that will allow executives to challenge the current business model and think outside the box, so you have something special to build a turnaround on.

“If they did not have that as an incentive, right away you can see what they would have wanted to do was cut costs,” Ramirez explained about the retailer that incentivized the bond offering. “The board understands they will complete the $20 million bond raise, and they expect they will invest this $20 million wisely. That's a much different message than saying, ‘We need to cut costs to the bone,’ and have nothing left for investments.

“It's milestone measures like that, in whatever time frames that are given, that will determine the success of the turnaround at the company.”

He said BDO counsels clients that even though they might be in a turnaround situation, they don't necessarily need to find a so-called “turnaround specialist.”

“Instead, we tell them to look for someone who can lead them out of the predicament they are in, but can still come out with their integrity and credibility intact,” he said. “If they can do that, then they should really be able to manage the company going forward.”

Usually when companies hire turnaround specialists, they take a “slash and burn” approach, Ramirez said, and after they leave in a year or two, the people who remain have lost their focus.

“Instead, companies should look for a future manager that will stay with the company past the turnaround,” he said, “because that will increase accountability, and increase responsibility, and force the executive to make decisions that will be better for the company in the long term.”

Such situations require exceptional leaders, who can get people — both subordinates and the company's investors — to buy into their vision for the future.

“It takes guts to tell investors, ‘This is going to take longer than a quarter to achieve our goals, but we are going to make it. We are not going to be the same company, but we are going to make it.’”

He agreed that executives that step into such situations must typically be paid at a higher level commensurate with the higher risk

In addition, “there is reputational risk that goes along with it,” he explained, because of the possibility that a failed turnaround will taint an executive's resume.

Long Odds

Tamez of Austin-Michael noted that many companies wait too long before they make a serious attempt at executing a turnaround, and they end up failing in the highly competitive environment of grocery retailing.

“The problem is, by the time they get good people there, it is typically too late,” he said.

Companies like Penn Traffic of Syracuse, N.Y., and Minyard Food Stores of Dallas are examples, as was Bruno's in Birmingham, Ala. All have since been more or less dissolved, with the remnants gobbled up by other companies.

“Bruno's was a wonderful, privately owned chain, and they brought in a wonderful group of people, laden with talent,” Tamez explained. “But it became so late in the game that by that time Wal-Mart had them surrounded at every side.”

He noted that at A&P, Martin has acquired “wonderful talent,” but the question is, “Was it too late?”

“The problem is, when talented people come into an organization, the enterprise might already be too far gone to make the kind of differences that the board originally hoped they could make when they hired them,” he said.

At Winn-Dixie, for example, a series of changes implemented by CEOs with strong backgrounds have not prevented the company from continuing to shrink, even though the company is managing to remain viable.

Often, Tamez said, brilliant CEOs take over a struggling enterprise, only to find that “their agenda ends up being more about plugging the leaks than about charting new waters.”

“The difference between those two agendas is 180 degrees,” he pointed out. “These companies end up hiring truly fine offensive players, but then they find themselves playing defensive positions, and there becomes a mismatch.”

Executives are attracted to these positions because it might be their first opportunity to lead as a CEO.

“But very few executives full recognize the magnitude of the challenges or the task at hand until they get inside and get behind the steering wheel,” he said.