"Associates Are the Key to Our Success" (part of Chapter 3)

Any successful company will invariably take note of the collective efforts and hard work of their employees. Kohl’s, of course, is no exception. Let’s break this down this review into two categories: hourly paid associates, and executives. Both have played vital roles, and Kohl’s has treated both populations well, generally keeping disputes and internal controversy to a minimum.

Without fail, in the opening letter from the CEO in the Kohl’s Department Stores Annual Report, there is always glowing praise and appreciation for the hard-working hourly associates in the stores, warehouses, and corporate offices:

1995 – “Our record results are due to the hard work and dedication of each and every one of our Associates…”

1997 – “Kohl’s record-breaking numbers are the result of the efforts of each and every one of our 32,000 associates.”

1999 – “When we talk about the people behind Kohl’s success, first and foremost are our Associates. They are truly exceptional.”

2001 – “There are many attributes that differentiate Kohl’s from the competition and position us for continued growth. None of them would be possible without our outstanding team of Associates.”

Yeah, I know most all other companies do the same, but with Kohl’s the continual thanking of the sales associate is always front and forward. You can rest assured that the phrase “associates are the key to our success” will continue to be part of the KSS mantra, even though the primary spearcarrier of that mantra, Bill Kellogg, is long gone from the daily running of the business.

How this concept plays out in the real world isn’t quite so ecstatic, of course. The rate of sales associate turnover is improving…but it’s still not particularly good. It’s just an improvement from how positively dismal it was a in the mid-1990’s. Of course, it’s difficult for any store to retain these workers over an extended period of time. For the most part, company loyalty is a thing of the past. Keep in mind, the average hourly rate for a sales associate is about $10.00 –12.00.

Yet to financially support the claim that “associates are the key to our success”, the company, after years of evaluation, eliminated their traditional employee pension plan in 1996 and gave associates the opportunity to roll their pension funds into a 401K plan. The company began making annual contributions to this plan.

In addition, the Employee Stock Ownership Program (ESOP) each year makes a contribution. From an initial contribution of $1 million in 1992, the value of the company contributions to this program was more than $87 million at the end of 2002. Also, the corporate headquarters has headed excellent daycare facilities, as more recently, has launched a healthcare facility for employees to get quick and low-cost access to a primary care physician.

“Taking care of your people” has also clearly been a priority with the executives in the company. From the beginning of the business model, Kohl’s put a major emphasis on executive recruitment and development. Bill, Jay and John knew they were going to grow quickly, so they put a great deal of time into the interview process: Saturday mornings was always the day for interviewing people at the corporate offices, where we had an in-house staff always under pressure to fill all of the open and newly created corporate and regional storeline positions. With the kind of growth we were experiencing, we were often bringing in over 250 new executives into the company, just to handle the new store openings. Today, that number is no doubt much higher.

Recruiting for the stores was not as easy as it might appear today. To begin with, we often required new executives to join us at a level below their existing position at their current company, so that they could learn all about the “Kohl’s culture” without undue pressure and, using a term I must have used thousands of times during my years of recruiting, “set themselves up for success.” For example, we would tell a District Manager of a group of sporting goods stores that we’d want him to come in as a Store Manager of one of our larger volume units. Or we would want a Target Store Manager to come in as an Assistant Store Manager just for a short period of time to get acclimated to our company. Most everyone who joined Kohl’s from the outside had to do this, myself included, enduring what I often referred to as The Ego Hit. While it was a very difficult pill for many people to swallow (and lots of capable, sharp people didn’t), those who did take the ‘hit’ more often than not came in, got acclimated, then moved up the career ladder. But it could be a hard sell when you were trying to take the cream away from your competitors.

Another challenge while recruiting was that the basic concept of stock options was foreign to many people in the industry, and they tended to discount the upside in their consideration of the offer. Before the stock splits in the late 1990s, the mentality of most recruits was “show me the money.” To make matters more challenging, Kohl’s, as part of its low-cost culture, has historically had low base salaries compared to the rest of the industry. For example, the average base salary for a store manager at Kohl’s in the last ten years has been approximately 25% less than the average salary for a store manager at Target. That spread is even greater when compared to store managers at Sears, Macy’s or JC Penney’s.

But that ‘gap’ has been filled by the long and rich tradition of end-of-year bonuses given to all executives based on the achievement of a total company attainment of certain earnings per share (EPS) hurdles. At the beginning of each fiscal year, certain assumptions were presented to all of us in determining how these hurdles were established. In true Kohl’s conservative fashion, the presentation focused on what it would take to achieve a 5% bonus:

–5% comp store increase for both Spring and Fall

–successfully opening scheduled new stores for the year

–an inventory shortage that was close to historical averages (which, incidentally, has been very low compared to the department store industry as a whole)

–a basis point reduction in S,G & A expenses (typically, around .24%) reflecting the continued leveraging down of expenses through top-line growth and solid expense management

While a possible 5% year-end bonus was nothing to sneeze at, things got more interesting when the possible bonus scenarios discussed the “what if” comp store sales for the year were greater than 5%. I mean, for so many years, we were knocking the cover off the ball with comp-store sales significantly greater than 5%. What effect on the bonus would a comp-store increase of , say, 7% , or even 9% have on the bonus percentage?

Basically, for every 100 basis point improvement in comp-store sales (say, from 5% to 6%), the impact on earnings would be significant, and the bonus would rise about 3.5 points (in this case, from 5% to about 8.5%). Get up to around a 9% comp-store increase, and the executive bonuses would get close to maxing out (in the range of 22.5% to 33.0% of base salary, depending on your level).

The bonus plan was a major incentive for all of us. What is noteworthy is that it was based on a team effort, yet another example of how the culture of the company focused less on the individual and more on the collective achievements of the entire organization. The results were always a much anticipated major part of the quarterly meetings. The then CFO, Arlene Meier, would show updates letting us know where we stood. I recall in the mid-1990s, after the second year of maxing out our bonuses, we went for the THREEPEAT. Mission accomplished later that next year, we celebrated by handing out bottles of root beer at the year-end Management Committee. The bottles had custom labels with Jay Baker’s photograph, with the line underneath which read “This 3-Peat’s For You!”

As it has turned out, over the decade of the 90’s, the executives at Kohl’s have maxed out their bonuses on all but two or three of the years. How can you tell? (hint: the annual 10-K’s list additional compensation for the top execs; you can do the math and make the determination).

During the major rapid growth years of the 1990’s, Kohl’s was able to successfully recruit some of the best executives in an industry where a lot of executive search companies bemoaned the lack of talent. Retailing is amazingly tough, it takes you away from your family for huge chunks of the week (and weekend), and not as many people are getting into it after college as before. But Kohl’s consistently has been able to open new markets with a high quality of executives, some moved in from existing markets to complement the new hires.

Fast forward to 2007, and the issue of executive retention and compensation has a different ‘take’ than the heady days where we enjoyed the benefits of three stock splits in 48 months, from April 1996 to April 2000. To be sure, Kohl’s financial performance has deteriorated this decade, and as a result, executives have not had same kind of bonuses as in years past. In addition, Kohl’s stock has significantly underperformed the S & P 500 in the past seven years; the stock is trading in December, 2007 at a lower price than when I left the company in April, 2007. There has been no stock split since then.

But it is important to acknowledge that while the executives that have joined Kohl’s in the last few years have not yet been able to make major financial gains with the appreciation of their stock options, during the ‘rise’ of Kohl’s in the 1990’s into a national player many, many executives became millionaires(and three became billionaires) as a result of the the impressive performance of the company.