Limits on Executive Pay: Easy to Set, Hard to Keep

Can companies keep good executives without succumbing to the pressure of escalating pay packages? Yes, but it's not easy, as the example of Whole Foods Market Inc. shows.

The natural-foods grocer limits compensation for top executives to a multiple of the average Whole Foods worker's pay. The cap, which covers salaries and bonuses but not stock options, started at eight times average pay in the 1980s, and was raised to 14 times in the early 1990s as the company grew and went public.

Last year, as sales hit $5.6 billion and rivals tried to poach Whole Foods managers, the board of directors raised the cap to 19 times average pay, or $607,800. The increase was needed "to help ensure the retention of our key leadership," Chief Executive John Mackey wrote in a Nov. 2 message to employees. Mr. Mackey said every top executive, except him, had been repeatedly approached by search firms seeking to lure them to rivals.

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Whole Foods's move underscores the strong tug of rising executive pay -- even on companies like Whole Foods that try to buck the trend. The gap between CEOs and other workers has been growing since the late 1970s. The average big-company CEO made $11.6 million in 2005, or 411 times the typical U.S. worker, according to the Institute for Policy Studies, a progressive think tank cited by Whole Foods. The CEO pay figure includes salary, bonuses, stock grants and gains from stock options.

By that measure, Mr. Mackey made around $2.7 million in 2005 -- about 96 times the average worker. In 2006, Mr. Mackey said he would cut his salary permanently to $1 per year, and donate future stock options to two company-created foundations.

Other companies have had mixed success in limiting executive pay. Ice-cream maker Ben & Jerry's dropped its pay cap in 1994 when it hired an outside CEO to replace co-founder Ben Cohen. Office-furniture maker Herman Miller Inc. eliminated its salary cap in 1996, as the company faced trouble recruiting top managers. James Sinegal, CEO of Costco Wholesale Corp., has for years voluntarily capped his salary at $350,000, although the company says it doesn't track the ratio of executive-to-worker pay.

Companies such as Starbucks Corp. and Intel Corp. say they consider "internal pay equity" in setting executive pay, although the phrase can mean many things. (See separate section on executive pay in today's newspaper.)

At Whole Foods, the board tries to keep compensation high enough to retain executives, but "not so high that it creates a negative perception with our other stakeholders," according to the company's 2007 proxy statement. Officers typically are paid salaries, bonuses and stock options.

Not all Whole Foods's workers are satisfied with the cap, because it excludes stock options. "It always seemed to us that it was a pretty hollow gesture," says Debbie Rasmussen, who worked in a Madison, Wis., store from 2000 to 2003 and tried unsuccessfully to start a union there.

In his November letter to employees, Mr. Mackey said Whole Foods tries to distribute stock options equitably. The top 16 executives received 7% of Whole Foods options in 2005; at many large U.S. companies, he wrote, officers get a majority of options. Whole Foods cut option grants last year in response to new accounting rules, says Paula Labian, vice president of human resources.

Even with last year's increase in the salary cap, each of Whole Foods's top six executives hit the maximum, and had to forfeit as much as $237,000 for which they were eligible under a bonus program.

Executives say they stay for other reasons. The company prefers to promote from within, so executives tend to be loyal veterans. Whole Foods' top 25 executives have an average tenure of 18 years, and a 2% annual turnover rate, says Lee Valkenaar, executive vice president of global support.

Whole Foods's corporate culture is another draw. Ms. Labian says the company's egalitarian philosophy -- all employees vote on their benefits package every three years -- and its many social-welfare and environmental projects keep her there, despite offers of twice as much in pay.

Mr. Valkenaar, who started as a produce worker 20 years ago, last year was paid $607,800 in cash and given stock options valued at $87,000. He was eligible for another $493,845 in deferred compensation, but had to forfeit $136,000 because of the salary cap.

Even so, he says he supports the cap and has rejected a multimillion-dollar offer from a rival. "In me, they're talking to the hardest nut to crack," he says. "We have a cap for a reason; I knew it when I took the job."