1. No category

Vote FOR Proposal No. 8 at Wal-Mart Stores, Inc.
Request for Annual Report Regarding Incentive Compensation Plans
Dear Wal-Mart Stores Inc. Shareholder,
Please vote FOR Proposal No. 8 at Wal-Mart Stores, Inc.’s annual meeting on June 5, 2015. The
Proposal requests that the Board of Directors (the “Board”) of Wal-Mart Stores, Inc. (“Wal-Mart” or the
“Company”) adopt a policy that the Compensation, Nominating and Governance Committee (the
“Committee”) will annually analyze and report to shareholders whether Walmart’s incentive
compensation plans and programs provide appropriate incentives to discourage senior executives from
making investments that result in declining rates of return on investment (“ROI”).
I believe this proposal is necessary for two key reasons:
1) The Committee has failed to align incentives for senior executives with the interests of long-term
shareholders; and
2) The Committee has continually lowered performance targets, meaning senior executives receive
above-median compensation for their peer group despite weak performance.1
The evidence for these failures includes:
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ROI has fallen for eight straight years, yet the Committee has lowered ROI targets for
performance-related-pay in each of those eight years2;
Over the last five years, same store sales growth has averaged just 0.1%, while new store growth
has averaged 1.5% in square footage terms;
New store growth has been cannibalizing existing store sales by at least 1/3 last year, and at an
average rate of 80% over the last five years3;
Over the last five years, invested capital has grown more than twice as fast as operating income;
The Committee has increased the incentives for sales growth while reducing the emphasis on
ROI; and
In fiscal year 2015, CEO Doug McMillon received 811 times per hour what the average WalMart store employee will earn in fiscal year 2016.4
I have worked at Wal-Mart for more than 15 years and been a shareholder for much of that time. I am a
member of the Organization United for Respect at Walmart, a group of employees advocating to improve
their jobs and the Company.
Misaligned Incentives
Since 2011, the Committee has increased the incentives for total sales growth and eliminated the
incentives for same store sales (SSS) growth. SSS growth is a key performance metric that illustrates how
well management is delivering value to customers. Wal-Mart reports it every quarter, touts it as critically
important, and bases bonuses for store personnel on it, in part. By contrast, total sales growth can be
increased by building new stores, even if those new stores “cannibalize” sales from existing stores.
By increasing incentives for sales growth, Wal-Mart’s performance pay plan risks encouraging senior
executives to invest in building new stores even if doing so leads to the cannibalization of existing stores
and lower returns on investment. This appears to be the case in recent years. During the six-year period
ending January 31, 2015, total sales at the Wal-Mart US division grew by an average of 2.1%, but same
store sales growth averaged just 0.1%.
WMT US: Widening Sales Gap
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
2010
-1.0%
2011
2012
2013
2014
2015
-2.0%
Comp sales (WMT US)
Sales growth (WMT US)
Based on Wal-Mart’s disclosure, the rate of cannibalization—the percentage of new store sales which
came from existing WMT US and Sam’s Club sales—averaged above 80% over the last five years. In
those years, invested capital grew at more than twice the rate of operating income growth. The result:
return on invested capital has fallen from over 23% in 2008 to 16.6% in fiscal year 2015.
As return on investment has fallen over the years, the Committee has dropped the annual ROI target for
performance-related-pay:
WMT ROI: The Slide Continues
20.00%
19.00%
18.00%
17.00%
16.00%
2010
2011
2012
Adjusted ROI
2013
2014
2015
Threshold
Moving Targets
Each year, the Committee adjusts reported sales, operating income, and return on investment for the
purpose of measuring whether the Company hit its cash incentive and long-term performance share
targets. Purportedly, these adjustments are meant to reflect developments that are out of the control of
management and discourage decisions that are not in the best interests of the Company.
For fiscal 2015, adjustments included removing the impact of store closings and restructurings, the impact
of losses and accruals for litigation, and the impact of e-commerce acquisitions. Each of the adjustments
had the impact of increasing operating income and thus the cash incentive award to senior executives. All
of these items are under the control of management and reflect its strategic decisions. Thus, shareholders
were rewarded based on the reported operating income that resulted from all management decisions, but
senior executives were awarded based on an adjusted operating income that excluded some of their
decisions.
Unbalanced Compensation
Senior executives are not the only employees who need the proper incentives. Associates who operate the
stores and interact with the customers who drive sales also need incentives aligned with the long-term
interests of the Company and its shareholders. Despite the pay increase to associates announced by CEO
Doug McMillon in February, the incentives for store associates are still misaligned. Mr. McMillon
received more than $19 million in compensation for fiscal 2015. At an hourly rate, that is some 811 times
the average hourly pay received by store associates as disclosed by Wal-Mart.5 This vast gap discourages
associates, which can hurt the Company’s performance and, ultimately, shareholders’ returns.
Proposal No. 8 asks the Committee to analyze and report annually to shareholders on how Wal-Mart’s
compensation plans may discourage senior executives from pursuing sales growth at the expense of
returns. Given the misaligned incentives, continually dropping performance targets, and adjustments that
allow Wal-Mart senior executives to receive above-median compensation while shareholders see return
on investment fall, the Proposal is urgently needed.
Please vote FOR Proposal No. 8.
Thank you.
Mary Watkines
Federal Way, WA
1
According to Equilar, Wal-Mart for its fiscal year 2015 ranks in the 72nd percentile for pay, but just the 40th
percentile for total shareholder return.
2
Unless stated otherwise, figures in this letter come directly or are calculated from Wal-Mart Stores, Inc., Form 10K and Proxy Statements, 2008-2015.
3
Calculated based on total WMT US and Sam’s Club sales cannibalization and new square footage growth, as
disclosed in Wal-Mart Stores, Inc. Form 10-K, 2011-2015.
4
McMillon’s hourly compensation calculated by dividing his total compensation by 52 weeks for the year and 40
hours per week. See Wal-Mart Stores, Inc., 2015 Proxy Statement, April 22, 2015, p. 66. Average store employee
hourly pay calculated as the weighted average of full-time employee hourly pay and part-time employee hourly pay.
For hourly pay, see Wal-Mart Stores, Inc., “Walmart to Increase Wages for Current U.S. Workers to $10 an Hour or
Higher,” available at: http://cdn.corporate.walmart.com/a1/0e/6fec066e4cf48b9ec4b9f09bcd67/associateopportunity-fact-sheet.2.pdf. For the ratio of full-time to part-time employees, see Wal-Mart Stores, Inc.,
“Walmart’s Fiscal Year 2015 Q4 Earnings Results Media Call Transcript February 19, 2015,” available at:
http://cdn.corporate.walmart.com/b5/c2/51e31e624ebcbebce63bff7a4ff9/walmarts-fiscal-year-2015-q4-earningsresults-media-call-transcript.pdf.
5
Ibid.