Featured: Howard Schultz, CEO, Starbucks
Originally published: Jan. 27, 2012
You might have heard that your Starbucks coffee is getting more expensive because of the rising price of beans. But there may be another reason: the big pay that the coffee giant scoops out to CEO and founder Howard Schultz.
All told, Schultz got $65 million last year. At, say, $3.25 for a tall latte, that's 20 million cups of joe. But the total is only one of several reasons the Starbucks ( SBUX ) chief is my latest "One-Percenter of the Week."
First, his triple-espresso pay puts him in an elite group of $50-million-plus CEOs. His basic pay alone, called "direct compensation," was nearly $16.4 million, 55% higher than the median S&P 500 ( $INX ) CEO pay of $10.6 million for 2010 (the latest year available) as calculated by Equilar, an executive compensation research firm. The rest includes $36.8 million from cashing out options, and a "retention bonus" of $12 million.
Second, that $12 million retention bonus is a mystery to me, for a number of reasons. Schultz founded Starbucks, and he has faithfully served as the company's chairman since 1985. He returned as CEO in 2008, when the company was struggling. He also has huge exposure to the company's stock, owning 30.6 million shares.
That's plenty of reason to stick around, and he's not about to run off and work for Green Mountain Coffee Roasters ( GMCR ). So paying him a retention bonus is like giving a New York Giants fan free tickets for the Super Bowl, then throwing in cash as an incentive to actually go to the game. Not needed.
Third, he's not exactly hurting for cash. According to the company, Schultz recently owned $117.4 million worth of vested stock options, and an additional $51.7 million worth of unvested options. "Vested" means that he is free to cash out the options. His company-paid home-security costs alone, at about $200,000, are around four times the typical household income in the U.S. But at least it is down from the $681,000 in home-security costs the company paid in 2009, points out ISS Proxy Advisory Services.
An outsized pay gap
Fourth, there's the vast pay gap between Schultz and the bulk of his employees. According to PayScale.com, which estimates industry pay levels, Starbucks baristas and food managers make $24,800 a year, on average, excluding any income from stock-options programs. This means Schultz makes more than 660 times as much as his baristas and other workers, a ratio well more than twice the typical CEO-to-worker pay imbalance.
Even assuming he worked 80-hour weeks and took only two weeks off, Schultz made $4,100 an hour, compared to a typical barista wage of probably around $12 an hour. "I wonder how Starbucks' baristas feel" about Schultz's pay, says Lisa Lindsley, who monitors CEO pay closely as director of capital strategies at the American Federation of State, County and Municipal Employees.
No doubt, he's done well
Now, to be fair: Schultz founded the company, and his return to the CEO slot seemed to turn it around, so he's created plenty of jobs for 99-percenters. The company employs about 200,000 people, and it added 3,700 net jobs last year, says Jim Olson, a Starbucks spokesman. The company plans to open at least 200 new stores in 2012 and redesign 1,700, which will create thousands of jobs, says Olson.
Starbucks also says the retention bonus for Schultz was a way to "recognize his leadership in the transformation of the company" and to ensure he continues to lead Starbucks "through the next phase of critical growth." Olson notes that 89% of Schultz's pay is linked to company performance, so his compensation is partly a reflection of how well he's done as a CEO and how much the stock has gone up as a result. Starbucks stock advanced about 45% last year, compared with flat returns for the S&P 500.
Those stock gains are due to solid performance. Most recently, total sales increased 16% to a record $3.4 billion in the fourth quarter, and sales at stores open more than a year were up an impressive 9%, on a 7% increase in traffic. Earnings were up 11%, in part because Starbucks didn't pass all of the bean-price increases to consumers, sharing a little of the pain with shareholders in the form of lower profit margins. And the company opened 241 new stores, net, reaching 500 stores in mainland China and Latin America.
Latin America brings us to another issue. Starbucks has come under criticism in the past for not buying "fair trade" coffee beans, or beans produced by groups that protect the environment and pay a reasonable wage. Starbucks' website says 84% of its beans are "fair trade" sourced.
But that begs the question of how big the pay gap is between Schultz and the people who pick his beans. "Even fair-trade coffee doesn't assure pickers get a living wage," says Karanja Gaçuça, a frequent spokesman for Occupy Wall Street and former Wall Street analyst. Gaçuça adds that the $12 million retention bonus alone "could go a long way to compensate those workers, instead of going into the bank account of a CEO."
