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J.C. Penney: CEOs may change, but the losses endure

Shoppers During The Grand Opening Of A J.C. Penney Co. Store In BrooklynShoppers During The Grand Opening Of A J.C. Penney Co. Store In Brooklyn
Myron Ullman, chief executive officer of J.C. Penney Co.Photograph by Victor J. Blue — Bloomberg via Getty Images

When a company can’t keep or won’t keep its CEO, it signals either lack of strength in the C-suite, a floundering board, or both. Which is it with J.C. Penney? It looks like both.

After Ron Johnson departed in April 2013, the company rehired Myron Ullman, who had resigned in November 2011… to be replaced by Johnson. After over a year in the post, Ullman has yet to turn things around at the struggling retailer. On Wednesday, it announced that same-store sales were flat and net sales fell compared to the same quarter last year. While not as bad as last year, losses continue to mar the company’s fortunes. The operating loss for the third quarter was $54 million, according to Wednesday’s earnings call.

Instead of hiring an existing CEO from another retailer, J.C. Penney has made a more realistic CEO choice, Marvin Ellison, former executive vice president of U.S. Stores at Home Depot. Although this appointment does not seem as expensive a hire as Ron Johnson, the company still had to throw a lot of money at Ellison to buy him out from Home Depot. And that’s not the only expense. He will be subject to a nine-month “apprenticeship” under Myron Ullman, who will remain as CEO until August 2015 and then as executive chairman after that. During this period, the company will be effectively paying for two CEOs.

Corporate boards are responsible for succession planning, and J.C. Penney’s board is seriously in trouble in this area. There were no internal CEO candidates, apparently. The only other named executive officers in the last proxy statement were Kenneth Hannah (appointed as CFO in 2012), Janet Dhillon (general counsel from 2009), Brynn Evanson (Executive Vice President HR, appointed in 2013), and Scott Laverty (appointed Chief Information Officer in 2013). In addition to Johnson’s departure, Penney also announced the departures of Michael Kramer, former Chief Operating Officer, and Daniel Walker, former Chief Talent Officer. There doesn’t appear to be a COO at the company at all, typically the next in line for CEO at a retail company. Home Depot, on the other hand, had so many senior executives to choose from it didn’t choose Ellison, but Craig Menear, the company’s former U.S. retail president.

The current Penney board oversaw most, if not all, of this mess. Colleen Barrett has been a director since 2004, Thomas Engibous since 1999 and chairman since 2012, Kent Foster since 1998, Leonard Roberts since 2002, Javier Teruel since 2008, Gerald Turner since 1995, and Mary Beth West since 2005. Only Stephen Sadove and Ronald Tysoe joined the board in 2013, and B. Craig Owens was appointed in October 2014.

Penney shareholders seem to have given up on the company. Almost half of the company’s shares did not vote on any issue at all at the annual meeting on May 16 this year, including the election of directors. This board clearly has a lot of work to do to win them over.

While the appointment of Ellison, who was responsible for much of the turnaround at Home Depot over the last decade, appears to be a smart one, the board still failed, this time by spending too much on Ellison’s starting pay package.

Like Target, which appointed a senior executive from Pepsico in July, J.C. Penney’s CEO choice shows that the real market for chief executives is not other CEOs but the next tier down within senior management. The compensation committees and consultants of this world are using the wrong comparison group to set CEO pay. They should be using the pay of CFOs, COOs, and EVPs, not other CEOs, who already have the top job and aren’t interested in moving except if they are running a small company and want to run a big one. That is not the case at J.C. Penney, Home Depot, Pepsico, or Target, all very large companies that are unlikely to hire CEOs away from each other.

If board compensation committees used these second tier executives to determine CEO pay, the new median salary would be much lower than it is today. All the J.C. Penney board had to do was pay Marvin Ellison slightly more than he was paid at Home Depot and ambition would have done the rest.

Instead, the board awarded Ellison a package with far more upside than Ullman and bought out all of the unvested equity and cash he left behind at Home Depot. If I were a Penney shareholder (and I’m not), I wouldn’t simply abstain from voting for the sitting board members at the next annual meeting, I’d vote against them.