Starbucks Is Paying Howard Schultz An Enormous Amount of Money to Stop Being CEO
Starbucks CEO Howard Schultz made headlines recently by promising to hire 10,000 refugees in response to Donald Trump’s immigration ban, prompting a #BoycottStarbucks social media backlash from supporters of the President’s policy.
Schultz, however, can afford to shrug off the uproar: Not only will he step down as CEO of Starbucks (SBUX) in two months, he’ll get to keep his paycheck when he does. Having taken home $21.8 million in 2016, Schultz, whose net worth is an estimated $3 billion, has long operated under a promise by Starbucks that he’ll continue to make at least as much as the company’s CEO, even if he doesn’t have to do the job anymore.
The revelation, buried in a recent Starbucks securities filing, comes after Schultz announced in December that he would pass on the CEO title to the company’s current president and COO Kevin Johnson in April. Schultz himself will stay on in the newly created role of executive chairman, “focusing full-time,” he explained in the announcement, on developing a chain of upscale coffee shops known as Starbucks Reserve Roasteries.
Although Starbucks won’t disclose how much Schultz was paid in 2017 until early next year, the filing offers a major clue, saying, “Mr. Schultz will continue to be compensated as an executive officer upon his transition to the role of executive chairman on April 3, 2017.” The term executive officer distinguishes Schultz from the directors on the board who are not employees, whose annual pay is capped at $260,000.
While it’s technically possible that Schultz’s salary could be reduced to a level befitting a lower-tier executive officer—Starbucks’ lowest-paid executive officer made about $4.4 million in 2016—compensation experts say that’s highly unlikely. “I would expect that Howard’s base salary and annual bonus opportunity will not be reduced for 2017,” says Brian Foley, an executive compensation adviser.
The biggest indication that will be the case: When Schultz temporarily gave up the CEO role the last time around, in 2000, Starbucks continued to pay him as if he still occupied the corner office. The company later disclosed in a proxy filing that the board at the time agreed to continue paying Schultz at least as much the CEO, who replaced him.
Such a policy meant that for every raise the actual CEO got, the company paid double, eating up larger and larger chunks of earnings that might otherwise have gone to Starbucks shareholders. By the time Schultz resumed the CEO job in 2008, he was already pulling in about $10 million per year. Today, Schultz makes more than twice that much, with a base salary of $1.5 million. (To Schultz’s credit, he docked his own base salary to $6,900 for six months during the recession in 2009. But he still made about $644,000 in salary for the full year, and more than $12 million in total compensation.)
Outside of Starbucks, Schultz’s type of comfortable arrangement—where a CEO can walk in and out of the job without worrying about giving up any of his salary—appears to be unprecedented. Even other CEOs who have shifted to an executive chairman role, stepping down to step up, so to speak, have taken some sort of pay cut.
Larry Ellison, the founder of Oracle (ORCL), for one, lost more than half his annual allotment of stock options when he relinquished the CEO title to become executive chairman in 2014. (His base salary had already been cut to just $1 per year since 2009.) In fiscal 2016, the first full year in which Ellison was not CEO, his total compensation decreased by 35%—though it still amounts to $41.5 million, more than double what Schultz makes.
Even drug company Mylan (MYL), which sparked outrage for raising the price of its allergic shock treatment EpiPen, slashed the pay of its current executive chairman Robert Coury when he gave up the CEO job in 2011. Coury’s base salary was reduced from $1.8 million to $1.35 million after the transition, though he still makes more in overall compensation than the actual CEO Heather Bresch.
And Twitter (TWTR) founder Jack Dorsey, who is also doing a second CEO stint at the company, earned nothing when he served on its board after leaving the top job the first time in 2008. Although to be fair, he was fired. (Dorsey was given a large portion of Twitter stock options in 2011.) Upon his return in 2015, Dorsey also declined a salary and all compensation.
A Starbucks spokesperson hinted at the justification the company is likely to use for paying Schultz at least as much as he is making now, telling Fortune in an email that “he will continue day-to-day management activities at Starbucks, focusing on innovation, design, and development of Starbucks Reserve Roasteries around the world, expansion of the Starbucks Reserve retail store format, and the company’s social impact initiatives.”
Still, even if Schultz keeps showing up at the office every day, abdicating the CEO role frees him from some of the pressure of answering to shareholders’ concerns—especially after Starbucks stock fell 7.5% last year. And while Schultz probably has enough pull with the Starbucks board to keep his full pay, and then some, the company would likely be better off if he didn’t, says compensation consultant Alan Johnson of Johnson Associates.
“I think you’d want his pay to be cut in half to send a clear message that the other guy is the new guy,” Johnson says. “If taking a few million less helps the transition to the new CEO, that’s the smartest thing he could do.”