Measuring Well Matters

But what you measure matters at least as much. How do you pick the right metrics? How can you avoid unintended consequences of the metrics you choose?

Put yourself in the position of a giant retail business' compensation committee for a moment. You want to reward your senior executives' excellent performance, of course, but you also want to be sure that what you're rewarding really is excellent. So you need some good metrics. For years, a key retail metric has been "same-store sales", comparing sales results at stores that have been open for at least a year (which keeps you from overstating the bounce that might be the result of new-store-opening hype). It's a metric that industry analysts watch closely.

Why would your compensation committee drop that metric? That's a really good question.

In yesterday's New York Times, columnist Gretchen Morgenson asked precisely that question of Wal-Mart. And got no answer. (Full column, here; the switch in metrics was announced in a proxy statement the company filed a few weeks ago)

"The timing was certainly curious," Ms. Morgenson noted. "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."

Guess what the switch would mean for Michael T. Duke, the company's chief executive officer. You're right!! (Morgenson noted that the same-store sales metric "accounted for 30 percent of the weighted factors determining his performance pay in fiscal 2010".)

Removing the metric is "a failure to admit failure", according to a retail consulting firm's managing director.

But it's more than just that. It's a reminder that for too long now we've had one set of rules for those at the top and another set for those at the bottom -- and that's just wrong.

Remember that the Supreme Court is now deciding whether the largest class-action lawsuit in the country's history can move forward, Dukes vs. Wal-Mart, which alleges systematic discrimination in pay and promotion for women. (A decision is expected in June; the Supreme Court is not being asked to decide whether Wal-Mart actively discriminated against women, but at this point is only being asked to determine whether hundreds of thousands of women who have worked or are working at Wal-Mart have enough in common to create a "class". Click here for a 29 March 2011 article by Adam Liptak in the Times for more background.)

In addition, Wal-Mart last year eliminated a profit-sharing program for lower-level workers. Morgenson notes that "Last year, before Wal-Mart eliminated that profit-sharing program, it said it paid roughly $1.1 billion in profit-sharing and 401(k) matches to employees. In the future, it will offer only the 401(k) match."

Do I need to remind you whose salary is about to increase?

Burt Flickinger III, the retailing consultant, called the elimination of profit-sharing "the ultimate Ebenezer Scrooge story of the last holiday season.... Ebenezer makes all the money, and all the poor Cratchits working in the Wal-Mart stores become poorer and poorer."

Scrooge: it's not just for Christmas anymore.

My question is, simply, What was the compensation committee thinking? What has happened to the independence of boards?

Don't answer. I know. And it's too depressing.