Can a Pay Cut Save Martha Stewart?
Stephanie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For the past decade, Martha Stewart Living Omnimedia (NYSE: MSO) has struggled, repeatedly reporting losses as interest in her magazine and TV show have dwindled. An arrest for insider trading led to the cancellation of her first TV show, Martha Stewart Living, while competition from younger, fresher faces eventually drove her show Martha off the air.
Yet, in all this time, Martha Stewart continued to make a salary of $2 million, plus an additional $1 million in perks like paid personal fitness costs and a paid driver. As the business struggled to survive, the company reportedly pressured her to take a pay cut to no avail, but finally, she has agreed.
Of course, the 71-year-old celebrity homemaker will still make a jaw-dropping $1.8 million. As analysts point out, the meager ten percent pay cut, along with a drop in reimbursements for the above-mentioned personal expenses, is a meager effort to show shareholders she's interested in saving the business. With the financial woes MSLO faces, analysts believe it's far from enough to save the company.
In addition to reporting a 25% decrease in revenue in its most recent quarter, Martha Stewart's empire faces a lawsuit that might stop the company from selling its goods at J.C. Penney (NYSE: JCP). The original deal brought Martha Stewart Living $38.5 million and gave J.C. Penney a 16.6 percent stake in the company.
Already the outlook for MSLO was dark. Analysts expect MSLO's EPS to fall to -$0.09 by the end of the year. Late last year, the company scaled back its publishing division as subscriptions continued to fall, leaving the company to solely rely on its troubled merchandising deals.
Paying for losses
But MSLO is far from the first company to turn to cutting big salaries when finances are tight. J.C. Penney, Sears Holdings (NASDAQ: SHLD), and Newell Rubbermaid all made top-rank pay cuts in 2012 to compensate for company losses, leading analysts to note that for big companies, CEO pay may now be tied closely to how a company performs each year.
CEOs still make, on average, 380 times regular workers, but not new Sears CEO Edward Lampert. The company announced earlier this year that Lampert will make $1 per year to head up the beleaguered department store chain.
Sears lost $279 million in its most recent quarter, down 9% from the same quarter in 2012. With six straight years of dropping sales, shareholders hope a switch in CEO will make a difference. But the outlook for Sears is bleak, as analysts predict revenue will continue to fall. The company currently is rated as "underperform" by many analysts.
Don't pull out the violins just yet, though. Lampert's deal includes a $2 million bonus tied to the company's success, as well as up to $4.5 million in stock each year.
J.C. Penney's Ron Johnson
Now that its deal with MSLO is at stake, J.C. Penney should probably take a look at its salaries. Outgoing CEO Ron Johnson did experience a reduction in pay in 2012, but that was only because his $3.3 billion bonus is contingent on the company bringing in operating income of at least $1.1 billion. The company lost $1 billion last year, leaving Johnson's take-home pay at $1.5 million.
As Johnson was flying on the company jet from his home in California to J.C. Penney headquarters in Texas, the company searched for a miracle. The outlook for 2013 was low, even as the company promised America it would return to a more traditional concept, remodels of hundreds of stores cost the company even more much-needed revenue. With debt of nearly $4 million and $821 million in cash and cash equivalents, J.C. Penney may need to take a look at what it is paying its current CEO, Myron Ullman III.
Heading into the last half of 2013, the company's success is tied to hope that Ullman can turn the company around. With so many expenses to undo the changes made by Johnson, it will likely be well into 2014 before J.C. Penney can even hope to see a profit.
During this tumultuous time in the department store industry, tying salaries to company earnings is a wise way to slow the bleeding. Additionally, multi-million-dollar bonuses are a way to motivate leaders to make the changes necessary to save a business. With both Martha Stewart Living and J.C. Penney seemingly unwilling to make big slashes, the future of both companies could be questionable. Sears, on the other hand, at least shows investors a firm commitment to doing what it takes to turn the company around.
The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.
Stephanie Faris has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!