Making Ends Meet at Walmart

This has not been a good year for Walmart shareholders. Amid a torrid market over the last 12 months, this giant retailer's stock has flatlined, reflecting a slowdown in sales growth.

Nor was it a great year for many Walmart customers. In fact, the company cited a sluggish economy and cuts in federal food stamps for its weak sales increase of 1.6 percent in fiscal 2014. (Growth was 5 percent the previous year.) When you stop buying food, you know things are bad.

But Walmart executives aren't feeling the same pain. While the company's malaise is clearly laid out in financial tables — numbers don't lie, after all — when it comes to figuring the performance pay of top executives, let's just say the numbers can be made to fib.

I'll let Walmart's proxy filing explain.

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Each year, when measuring top executives' performance for pay purposes, the company says it makes various "adjustments" to its recorded financial results. In 2014, those adjustments resulted in better performance than reported in the audited statements. That enhanced performance meant higher incentive pay for executives.

Walmart routinely adjusts its results for pay calculations, the proxy said, so they can be "computed on a comparable basis from performance period to performance period." The company wants to exclude the impact of what accountants sometimes call extraordinary items — events not likely to happen again the next year.

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David Tovar, a Walmart spokesman, said the adjustments were intended to encourage executives to make the right decisions for the business. "For example, we don't want a delay in restructuring or store closings to be influenced because management could take into consideration how it might impact their bonus," he said.

Sometimes, these adjustments have brought down executive pay at Walmart; this occurred in 2012. But adjustments for the dismal 2014 wound up padding it.

This year, the company included far more adjustments than in recent years. The impact of 11 "significant" items — including store closings, delays in store openings and the sale of operations — was eliminated from its results. In each of the four previous years, the number of adjustments never exceeded five.

The current adjustments essentially make the costs or lost income disappear when figuring performance pay.

Consider the case of William S. Simon, president and C.E.O. of Walmart's United States unit. Under Walmart's pay plan, he would receive some incentive pay if sales grew more than 2 percent.

The trouble was, Walmart's United States sales rose only 1.8 percent in fiscal 2014. That meant Mr. Simon would miss his threshold.

Enter the adjustments.

After adjusting for certain items relating to the company's sales, the Walmart unit eked out a growth rate of 2.03 percent in 2014. On the strength of that "adjusted" performance, Mr. Simon received $1.5 million, the proxy noted. His total compensation was $13 million last year.

What adjustments helped Mr. Simon clear the bar? One action that the company took was to eliminate the decline in its United States sales that occurred after the government cut food stamp benefits — formally known as the Supplemental Nutrition and Assistance Program, or SNAP — by 5 percent last November.

That reduction in benefits hurt Walmart's sales, the company acknowledged, because many customers use food stamps in its stores.

But for executive-pay purposes, that sales decline never happened. And that meant a bigger payday for Mr. Simon.

Mr. Tovar said the adjustment relating to SNAP benefits was significantly smaller than those made because of store closures, transactions or other one-time events.

There's more. When figuring cash incentive pay, the company requires performance to exceed another threshold relating to its operating income. The bar is low — the company's total operating income could decline by 1.5 percent, the proxy said, and executives would still earn a minimum cash incentive payout.

Again, the adjustments provided a crucial lift. According to the company's annual financial filing, its actual operating income fell by 3.1 percent. But after making its adjustments — presto chango — the growth rate became a positive 1 percent.

Six of Walmart's top executives received a total of $8.42 million in cash incentive payments for 2014, the proxy said. Mr. Tovar declined to specify how much of that was generated by the adjustments.

This year's adjustments also differed from earlier years in an interesting way. Previously, the company said the changes were made "to ensure that our incentive plans reward underlying operational performance, disregarding factors that are beyond the control of our executives." This year, that language has disappeared from the proxy.

I asked the Walmart spokesman if this change meant that the company was now making adjustments to factors that are within the control of its executives. He said no, but that the company wanted "to make our disclosures more transparent."

Mary Pat Tifft, who lives in Kenosha, Wis., is a longtime Walmart shareholder as well as an employee — an associate, in Walmart parlance — of more than 20 years. She thinks these adjustments are the equivalent of an athlete moving the goal posts. "Walmart associates are having their hours cut because of declining sales but executives are still getting their bonuses," she said. "It's ridiculous that they can keep receiving their compensation because they keep moving the numbers around."

The average full-time hourly Walmart employee makes about $27,000 a year.

Ms. Tifft, along with her colleagues Charmaine Givens-Thomas and Janet L. Sparks, tried to get a shareholder proposal onto the agenda at this year's annual meeting of Walmart stockholders in June. The proposal would have required the executive pay calculations to include a measure that shows management addressing employee needs.

Walmart contended that it should be able to keep the proposal off its ballot because it had "substantially implemented the proposal." Last summer, the company surveyed its 2.2 million associates, Mr. Tovar said, and 71 percent, a record high, said they felt that management was responsive to employees.

The Securities and Exchange Commission sided with the company. Shareholders will not be able to vote on the proposal.

"As a shareholder and an associate, I thought the resolution was very important for Walmart," Ms. Givens-Thomas said in an interview. "Associates want more accountability for Walmart resources so we can all enjoy the benefits."

Stockholders and employees are certainly entitled to share in the benefits of a well-run company. But the way Walmart adjusts its results on behalf of executives indicates pretty clearly who comes first.

—By Gretchen Morgenson of The New York Times