Paying up: Hiring a new CEO from outside can be pricey

Corporate boards sometimes have to open the bank to bring in a new CEO from outside. That’s particularly the case in tough situations that previous management was unable to solve.


Turnaround CEO: Best Buy's Hubert Joly received $13.9 million in compensation.

The search for a new CEO presents Target Corp. with a tricky paradox.

In recent years, shareholders have grown more agitated over the big compensation packages that CEOs of giant companies typically receive. Target itself nearly lost a say-on-pay vote last year, with only 52 percent of share­holders backing its policies.

But to attract the right person, analysts think Target may well have to offer its next leader an even better package than ousted CEO Gregg Steinhafel received. Many observers are hoping for an outsider who can breathe new energy into the retailing giant, which has struggled with declining U.S. sales, a botched launch into Canada and a high-profile data theft just before Christmas.

“When you have to do a turnaround, or you have a company that has issues, it can be more expensive to bring in a new CEO,” said Hillary Sale, a law professor at Washington University in St. Louis. “They have more leverage in those moments.”

Overall, CEO pay dropped in 2013 in Minnesota. A Star Tribune analysis shows that median CEO compensation around the state fell 16 percent in 2013 to $1.026 million, compared with $1.22 million in 2012.

But companies that bring in new leadership to address challenging situations face pressure to get the best talent in place. Often that talent comes from outside, and it costs a premium.

Brian Yarbrough, an analyst with Edward Jones, said Wall Street will be “very disappointed” if Target does not hire an outsider. “But any time you go outside,” he said, “you’re going to have to pay more than for an internal candidate — that’s a given.”

In order to lure Hubert Joly in 2012, Richfield-based Best Buy offered a total package that turned out to be worth $21.2 million, compared with the $7.1 million the ousted Brian Dunn was paid his final full year. The Plymouth company Proto Labs, which is trying to accelerate growth dramatically, hired an outside CEO, Victoria Holt, at nearly twice the salary of her predecessor.

Internal CEO hires aren’t usually able to demand the same premium. Steinhafel, a Target veteran who lost his job as CEO this spring, was hired from within and earned a total of $9.9 million his first full year in the job. His predecessor, Robert Ulrich, earned $13.8 million in his last year in the job.

The same was true at 3M, where CEO Inge Thulin, a longtime executive of the company, earned a total of $10.8 million his first year, compared with the $14.1 million earned by his predecessor, George Buckley, in his final year. Both figures include the value of long-term equity awards when granted, not when exercised.

But even with executive pay under scrutiny amid a larger discussion of inequality, a new CEO plucked from outside a company can demand a more generous pay package.

“It’s expensive because you’re looking for the very best. They’re probably working for someone else, they’re high-profile, and they already have a really good pay package,” said Don Lindner, an executive compensation expert at ­WorldatWork, a nonprofit human resources association.

Outside candidates, particularly the small pool of people qualified to take over a Fortune 500 company, must leave behind stock options, restricted stock and other deferred compensation when they switch jobs, Lindner said. The hiring firm must replace what the candidate would lose by making the leap, offer a competitive salary and, when the company is struggling, reward the new CEO for taking on the risks of a fix-it job.

“You may also have to provide something, maybe a mega-grant long-term to make it very worthwhile if it gets turned around,” said Lindner, referring to companies in general. “There’s kind of a risk premium.”

Smaller companies face the same issue on a different scale.

Proto Labs has been a growth company where CEO Brad Cleveland willingly passed the torch to Holt. But Cleveland, who announced in October 2013 that he would retire, had a base salary of $270,000. Holt, a turnaround specialist most recently with Spartech, earns a base salary of $500,000.

In Target’s case, Yarbrough noted that the retailer is still a great brand and doesn’t need a wholesale overhaul. Rather, it needs to return its focus to home and apparel, which drove its prior success.

“They’ve had some recent hiccups, but they’re definitely fixable,” he said.

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