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The Thread: Obama’s Non-Doctrine Doctrine
Qaddafi is out. Is a new American foreign policy in?
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Off the Charts: Striving for Productivity, Chasing Germany
July 22, 2011 by Leave a Comment
New figures released by the European Central Bank indicate that progress is being made, but it is slow.
The figures show that unit labor costs fell 3.3 percent in Greece during the first quarter, and were off 2 percent in Ireland. In Germany, the star economy of the euro zone, unit labor costs fell 0.7 percent.
Those reductions were won at a terrible cost, however. Greece’s economy continues to shrink, while Ireland’s seems to have stopped losing ground but has yet to grow. Unemployment is above 14 percent in Ireland and even higher in Greece.
The accompanying charts show the changes in unit labor costs in Ireland and Greece, as well as in Germany and four other large economies that use the euro — France, Italy, Spain and the Netherlands. The E.C.B. said similar figures for Portugal, the other bailed-out euro country, were not available.
The first set of charts show the changes from the first quarter of 2010, just before the first Greek bailout forced the country to agree to a harsh austerity program, through the first quarter of this year, the latest figures available.
During that period, Greek unit labor costs fell 7 percent, nearly twice as much as those in Germany. Ireland’s costs were down almost 6 percent.
But all the other major countries continued to lose ground to Germany.
The second set of charts shows the changes in unit labor costs since the end of 2000, when Greece joined the euro zone. The figures are astounding. Germany’s unit labor costs declined nearly 7 percent over the period, a remarkable performance. All the other countries had increases, ranging from 11 percent in France to more than double that figure in Ireland.
If there were no euro, other European currencies would almost certainly have lost value against the German mark over the last decade. Instead, Germany’s trade surplus in goods rose sharply, while the rest of the euro zone’s combined trade deficit approximately doubled.
The reconvergence of the economies might be easier if Germany were to accept inflation, but it shows little inclination to do that. Indeed, largely because Germany has been growing at a rapid rate with some signs of inflationary pressures, the E.C.B. has begun to raise interest rates.
Unit labor costs are not the only variable in a country’s trade performance, of course. But they are important. The rest of the euro zone still has a long way to go if it is to regain the competitive position it had only a few years ago.
Floyd Norris comments on finance and the economy in his blog at nytimes.com/norris.
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Fair Game: Moving the Goal Posts on Pay
May 8, 2011 by Leave a Comment
All of which makes a recent decision about executive pay at this giant retailer downright puzzling. In a proxy statement filed a few weeks ago, Wal-Mart’s compensation committee said it had replaced a crucial metric for assessing executives’ performance: same-store sales, referring to stores that have been open for at least a year. Instead of that measure, Wal-Mart is using total sales companywide, or at its major units, Wal-Mart Stores and Sam’s Club.
Why? The change was “intended to align our performance share goals more closely with our evolving business strategy, which emphasizes productive growth, leverage and returns,” Wal-Mart said.
The timing was certainly curious. The switch came amid a sustained decline in Wal-Mart’s same-store sales, which have been falling for nearly two years. The company’s total sales, however, rose 3.4 percent in the latest fiscal year.
Shifting the goal posts meant more money for Mr. Duke in the latest fiscal year than he would have received under the old arrangement. His compensation totaled $18.7 million, more than $16 million of which was performance-based.
Same-store sales are an important metric for investors. A quintessential apples-to-apples comparison, they measure the productivity at established stores and eliminate sales spikes that might occur when new stores open.
Aware that investors obsess over these figures, Mr. Duke told analysts recently that turning around Wal-Mart’s same-store sales was his top priority. Last February, when the company announced results that included the seventh consecutive quarterly drop for the figure, its share price fell 3 percent.
So why remove this crucial performance gauge for pay purposes? Wal-Mart did not respond to a request for comment on the matter.
Certainly, past statements about why the board chose to include this measure suggest that it’s important. For example, Wal-Mart said in its 2008 proxy that its board had used “comparable-store sales as a performance metric because it believes it is a key driver of shareholder returns, and because investors look to comparable-store sales as an important measure of performance in the retail industry.”
Two years later, the company said its compensation committee included same-store sales as one of its benchmarks “because it believed that good performance relative to these metrics is important for our overall financial performance and, therefore, is likely to have a positive effect on shareholder returns.”
The committee added that “the combination of these performance metrics was likely to incentivize our executives to achieve performance that is in the best interests of our company and our shareholders.”
And yet, a year later, Wal-Mart jettisoned same-store sales from the mix. Explaining the decision, the proxy said the compensation committee concluded that “the combination of these performance metrics was likely to incentivize our executives to achieve performance that is in line with the best interests of our company and our shareholders.”
Talk about trying to have it both ways.
KEEP in mind that when Wal-Mart included same-store sales in its pay calculations, that measure had a sizable effect on Mr. Duke’s compensation. Indeed, same-store sales accounted for 30 percent of the weighted factors determining his performance pay in fiscal 2010 (which consisted of most of 2009 and the first month of 2010).
Removing same-store sales from its pay-for-performance measures “is a failure to admit failure,” says Burt Flickinger III, managing director at the Strategic Resource Group, a retailing consulting firm. “This is the first time since the company was founded that, during a recession, same-store sales were consistently negative in contrast to key competitors like Costco, Target, TJX and BJ’s.”
Mr. Flickinger says he expects Wal-Mart’s same-store sales to keep declining in the coming months.
The switch at Wal-Mart last year followed a shift in 2009 that allowed the company to set performance targets annually. In previous years, the board had set performance targets for three-year periods. The goals had to be met over that time before company executives could receive certain incentive pay awards.
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