case studay
Journal of Business Case Studies – First Quarter 2018 Volume 14, Number 1
Copyright by author(s); CC-BY
Green Leaf Grocery – Executive Compensation Case Study
Marcus Z. Cox, Stephen F. Austin State University, USA
Robert Mitchell Crocker, Stephen F. Austin State University, USA
ABSTRACT
The primary purpose of this teaching case is to aid students in understanding how
executive compensation plans are utilized to achieve organizational goals and to then
construct their own executive compensation plan for the CEO of Greenleaf Grocery, a
fictional retail business based on an actual company.
Students have the opportunity to create a comprehensive executive compensation plan
using salary, bonuses, stock options, benefits, and other compensation tools. Additionally,
the case provides the opportunity to discuss the use of both short-term and long-term
incentive compensation. The company in this case is poised to undertake an initial public
offering of stock and retaining the current CEO is viewed as critical for this next phase.
The case affords the class the opportunity to explore ethical issues in executive
compensation as well as other aspects of the organization’s overall compensation
structure.
Keywords: Executive Compensation; Teaching Case; Initial Public Offering; Ethical Issues
in Compensation
Suggested Courses: Human Resource Management, Compensation and Benefits,
Strategic Human Resource Management, or Management Principles
INTRODUCTION
Maria Sanchez, the Chair of Green Leaf’s board of directors, hung up the phone. It had
been a long week and she had just received frustrating news. Jack Lawrence, the CEO of
Green Leaf had just called to inform her that he had been approached by the board
chairman of one of Green Leaf’s competitors in the grocery business asking if he would be
interested in joining their company as CEO. Jack knew it was a small world and that this
news might reach Maria or other board members and he wanted her to know that he had
not initiated this contact. Jack was a talented, aggressive executive in the grocery industry
and it was not surprising that he was getting attention from rivals. But Maria also suspected
that there was some political gamesmanship involved here as Jack and the board of
directors at Green Leaf had been working on the parameters of a new compensation plan
for the CEO.
Journal of Business Case Studies – First Quarter 2018 Volume 14, Number 1
Copyright by author(s); CC-BY
As Maria drove home that night she reflected on Jack’s contribution to Green Leaf. He had
been brought in as CEO following the then CEO’s untimely death in 2005. Back then, as an
ambitious, regional vice president for Target, he had sold the board on his vision for Green
Leaf and his desire to grow the chain. Some had believed that he was too young and
lacked the experience necessary, but he had proved them wrong. During his time as CEO
Jack had grown the number of stores from 62 to 118 via natural growth and an acquisition
of a competitor. Today Green Leaf was poised to go public with an IPO scheduled in the
next year and a long-term goal of acquiring a chain of existing stores in the Southeast that
would provide Green Leaf with market coverage from New Hampshire to Florida.
Maria knew the key to executing all of this rested on retaining Jack as CEO. She knew that
the compensation committee of the board needed to develop an offer that was competitive
with the external market, that was aligned with several strategic objectives of the firm, and
that would keep Jack in place for at least the next 5 years. She also knew there would be
pushback on the announcement of what she anticipated would be a rather large
compensation package. When Jack was hired in 2005 there had been resentment by some
employees because of the large differential
of Jack’s initial contract to the average worker’s salary. There had even been a push by
some workers to form a union but that never materialized. Additionally, some of the core
customers of the company had balked at Jack’s original salary saying that it was counter to
the organization’s culture. She feared this new pay package would attract even more
criticism.
Maria picked up her phone and called her long-time mentor and former business professor,
Dr. Ray Jones. “Hi Dr. Jones, it is Maria. I’m sorry to bother you, but I need your help. We
are working on a new compensation package for our CEO and we need help. Earlier we
brought in a high-profile consulting team from Boston but we were very disappointed in
their recommendations. Would you be able to serve as an advisor?”
Dr. Jones always liked Maria and enjoyed hearing from her. “Maria, I would love to help,
but I’m just too busy right now; however, I know just the perfect group of students who can
assist you. Send me what information you can and I will get them working on this project.”
Maria hung up the phone at the end of the conversation and a smile spread across her
face. She relaxed for the first time in days. She knew the students would offer a creative
solution to her problem.
Company History
Green Leaf Grocery opened in 1956 and was a small, family-owned grocery store in
Roanoke, Virginia. The founder, Thomas Campbell, ran a small, neighborhood store that
offered general merchandise. His eldest son, Fredrick “Fred” Campbell reoriented the
business during the mid-70s into more of a health food store and began selling more
organic products. Fred opened new stores and by 1985 there were 16 stores. In 1989
Green Leaf acquired a chain of health food / grocery stores and the total number of stores
Journal of Business Case Studies – First Quarter 2018 Volume 14, Number 1
Copyright by author(s); CC-BY
grew to 45. Despite Fred’s best effort to manage this growing business, the company
struggled during this time. He quickly realized that he did not have the management
structure in place to guide that large of an organization. Fred brought in more experienced
mid-level managers and continued his growth strategy. By the year 2000, Green Leaf had
62 stores in the Mid-Atlantic region and a smattering of stores in the Mid-West.
In 2004, Fred died unexpectedly of a heart attack. Given that Green Leaf was still a
privately held family business the board of advisors looked for a family member to assume
the leadership position, but no one in the family thought they were prepared at their stage
of life to take on those responsibilities. So the board conducted a search for an external
candidate and selected Jack Lawrence. Jack saw that the company was struggling and
quickly closed 9 of the worst performing stores and sold off 14 stores that were in the Mid-
West and didn’t seem to be a good fit with the company’s core business in the mid-Atlantic
region. Once the ship was righted, he began an expansion with new stores in nearby
markets that allowed the company to better leverage their marketing dollars and focus on
quality operations. Later, in 2009, he acquired 49 new stores with the acquisition of
Sunbeam Groceries in the North East. Sunbeam was rebranded Green Leaf Groceries and
along with new store openings the company’s total stores rose to 118 by 2014.
Due to the company’s recent growth and desire to acquire more competitors, the board of
directors had decided to pursue an initial public offering (IPO). The IPO was scheduled to
occur in the latter half of 2016. The company intended to use its stock as a means of
acquiring additional stores in the future.
Last, with the company’s meteoric rise, there have been some strains on the company’s
culture. Previously, Fred Campbell made a very low salary that was in line with the other
employees. But as the CEO salary has increased and as profits have increased there has
been some pushback from employees and long-term customers. “They see us as selling
out to corporate greed and turning our back on culture we had under Fred’s leadership”,
said John Fleming, vice president of human resources and a 30 year employee. “They see
us as becoming just another large, cold, corporate entity that is only focused on profit
maximization.” In 2009 there had been a push by some employees to unionize, but Jack
and the board had done a masterful job of communicating with all the employees why that
would not be in Green Leaf’s best interest and why it was not in their best interest. “Jack
did a great job then, but he had a lot of credibility with the workforce because his salary
was still relatively low. He could truly make the claim that we were all in this together. If we
now raise his salary too high, there is a chance that workers might feel as though Jack and
the board sold them out and will now want to consider another run at forming a union.”
Grocery Industry
The supermarket and grocery store segment of the U.S. economy (NAICS code 44511)
consists of roughly 41,076 businesses with revenues of approximately $611.9 billion. From
the years 2012 to 2016 the industry enjoyed a very modest 1.0% growth in sales. This
segment of the market is dominated by the Kroger Company with a 16% market share,
Journal of Business Case Studies – First Quarter 2018 Volume 14, Number 1
Copyright by author(s); CC-BY
Albertsons LLC with a 9.8% market share, and Publix Super Markets, Inc. with 5.5%
market share (IBISWorld.com, 2017-a).
Another segment of the U.S. economy that is active in the grocery business is warehouse
clubs and supercenters (NAICS code 45291). This sector of the economy generated
revenues of $460.0 billion and enjoyed a four year annual growth rate of 2.1%. The industry
consists of only 17 businesses and is dominated by Walmart Stores, Inc. with a market
share of 69.8%, Costco Wholesale Corp. with 17.4% of the market, Meijer Inc. with 3.5%,
Target Corporation with 2.9%, and BJ’s Wholesale Club Inc. with 2.5% (IBISWorld.com,
2017-b). Most of these supercenter concept stores have added groceries as a component
of the mix of goods and services offered.
As the Kroger company recently noted in their 10-K filing with the SEC, “The operating
environment for the food retailing industry continues to be characterized by intense price
competition, aggressive supercenter expansion, increasing fragmentation of retail formats,
entry of non-traditional competitors and market consolidation.”
Organic Grocery Segment
In March of 2017 the grocery industry received a bit of a shock when Whole Foods Market
(NASDAQ: WFM) announced the worst financial performance in over a decade with six
consecutive quarters of declining same store sales (Dewey, 2017). Whole Foods, the
originator of the organic and fresh grocery segment 36 years earlier, also changed course
on its earlier plans to triple the number of stores in the U.S. market from 470 to 1,200 and
instead announced the closing of nine underperforming stores. CEO John Mackey said that
the organization was losing customers to traditional big box grocers such as Kroger and
would change from a growth model to a model of retaining existing customers (Craig,
2017).
Whole Foods and similar organic grocers (e.g. Sprouts Farmers Market and Fresh Market)
have witnessed eroding sales due to Kroger’s Simple Truth organic brand goods which are
on average 15% less than Whole Foods’ prices (Peterson, 2017). Additionally, the grocery
chain Aldi offers both gluten-free items via their liveGfree brand and organic items under
the Simply Nature brand (Craig, 2017). Aldi, which currently operates in 35 states, plans to
expand by opening 650 new stores in the U.S. by the end of 2018.
Then in June of 2017, the grocery industry was jolted when Amazon (NASDAQ: AMZN)
agreed to purchase Whole Foods Market for $13.4 billion. The purchase of Whole Foods is
seen as threat to Walmart’s domination of grocery sales in the U.S. and is yet another sign
that Amazon wishes to continue its dominance of online shopping (Wingfield & de la
Merced, 2017).
Journal of Business Case Studies – First Quarter 2018 Volume 14, Number 1
Copyright by author(s); CC-BY
CEO Profile
Jack Lawrence, 56, is the current CEO of Green Leaf Grocery. Jack began his career in the
grocery business by working part-time at a local Kroger during high school and college. He
earned a BBA in management from Stephen F. Austin State University in 1982 and
accepted a job as a store manager with Safeway in Bakersfield, California. In 1994 Jack
retired from Safeway as a district manager and moved to Illinois to pursue a MBA from
Northwestern. While there he met his wife Lisa and they have two children.
Upon graduating from Northwestern in 1996, Jack was hired by Target to help grow their
grocery business. He left Target in 2005 to take the CEO position with Green Leaf. At the
time Jack was offered a salary of $175,000 with an opportunity to earn up to $120,000 in
performance bonuses. Over time Jack has received merit increases and his base pay
stands at $230,000.
Prior Consultant Product
Boston to design an executive compensation plan for the CEO of Green Leaf Grocery, Inc.
Unfortunately, the board was very disappointed in the proposal that Peabody & Stankly
submitted. “Basically all they did was look at the salaries of the CEOs of three of the largest
players in the grocery industry, take an average of that and tell us that is what we should
be paying. Are you kidding me?” Jeff Campbell, grandson of Green Leaf’s founder and
current board member, said in disgust. “First, they failed to grasp that we are nowhere near
that size. Second, they failed to consider any of the strategic objectives we are attempting
to accomplish with our compensation plan. Why, I bet if I grabbed three or four business
students and threw them together in a team that they could come up with a better plan than
that!”
Request for New Proposal
The board of directors would like you and your team to develop an executive compensation
plan to address the following goals:
1. Develop a compensation proposal for the CEO that would be competitive with
offers from rival firms attempting to lure the CEO away. The compensation
proposal should be a “total compensation” package in that it addresses all facets
of total compensation (e.g. salary, bonuses, benefits, and perks that are
consistent with someone of this stature).
2. Ensure that the company has a successful IPO and that there is continuity in top
leadership for the next five years.
3. Align the interest of the CEO with the stockholders of the firm.
4. Reward the CEO for reasonable risk-taking and growth of the firm.
Journal of Business Case Studies – First Quarter 2018 Volume 14, Number 1
Copyright by author(s); CC-BY
5. Last, the board has come under criticism from employees and die-hard
customers who see the company culture moving away from its early “family firm”
roots and becoming more corporate. The board is worried that there will be
negative reaction to what might be perceived as an “excessive compensation
plan” by some. They would like to know if you have any creative solutions that
might help alleviate that criticism.
To assist you in better understanding Green Leaf Grocery, the board of directors has
provided you with the company’s income statement and balance sheet for the past few
years. The information can be found in Table 1 – Income Statement and Table 2 – Balance
Sheet.
Journal of Business Case Studies – First Quarter 2018 Volume 14, Number 1
Copyright by author(s); CC-BY
Table 1. Income Statement
Green Leaf Grocery Income Statement (in millions)
2013 2014 2015 2016
Net Revenues $516.8 $1,100.0 $1,800.0 $2,400.0
Cost of Goods Sold 353.7 772.5 1,200.0 1,700.0
Depreciation and
Amortization 14.2 54.6 35.8 48.5
Gross Income 149.0 278.8 530.3 725.3
General Expenses 140.1 298.1 457.5 578.0
Total Operating Expenses 507.9 1,100.0 1,700.0 2,300.0
Operating Income 8.9 (19.3) 72.8 147.3
Extraordinary Change (0.4) (6.4) (3.1) (26.5)
Interest Expense on Debt 0.7 19.8 35.5 37.2
Other Expenses 0.3 0.4 0.6 0.5
Pre-Tax Income 8.2 (45.2) 34.8 84.1
Income Taxes (3.3) (17.7) (15.3) (32.7)
Net Income 4.9 (27.4) 19.5 51.3
Table 2. Balance Sheet
Green Leaf Grocery Balance Sheet
(in millions)
2013 2014 2015 2016
Assets N/A
Cash and Short Term
Investments $14.5 $67.2 $77.7
Receivables 7.2 9.9 9.5
Inventories 63.6 98.4 118.3
Current Assets 103.5 203.1 231.6
Total Assets 761.6
1,100.
0 1,200.0
Liabilities
Accounts Payable 53.9 82.7 111.2
Short-Term Debt 2.8 5.2 9.2
Accrued Expenses 11.0 14.9 14.0
Other Current Liabilities 15.2 19.6 14.0
Other Liabilities 90.6 136.8 175.6
Long-Term Debt 367.4 529.0 421.6
Deferred Taxes (43.2) (22.6) (15.3)
Other Liabilities 30.6 42.6 50.7
Total Liabilities 494.2 716.5 658.6
Total Owners Equity 267.5 386.8 513.8
Journal of Business Case Studies – First Quarter 2018 Volume 14, Number 1
Copyright by author(s); CC-BY
ACKNOWLEDGEMENTS
Conducted under a grant from the Stephen F. Austin State University Research
Enhancement Program.
AUTHOR BIOGRAPHIES
Dr. Marcus Cox serves as an assistant professor of management in the Management,
Marketing, and International Business department in the Rusche College of Business. He
earned his Ph.D. from the University of North Texas, his Certificate of Advanced
Management from Babson College, and his masters and bachelor degrees from Stephen
F. Austin State University. Dr. Cox teaches human resource management, compensation
and benefits, and strategic management. His research interests include human resource
management, organizational misconduct, executive compensation in the non-profit sector,
and training effectiveness.
Dr. Mitch Crocker is a professor of management and has served as Chair for the
Department of Management, Marketing, and International Business in the Rusche College
of Business for the past six years. He earned his Ph.D. from Auburn University and his
MBA and bachelor degrees from the University of South Alabama. He teaches employee
and labor relations and sports analytics. His research interests include employee/student
motivation, student learning styles, and motivation to participate in extreme sports. He is an
avid scuba diver and underwater videographer.
REFERENCES
Craig, V. (2017, February 9). After losing customers to Walmart and Kroger, Whole Foods
fights to keep ‘whole foodies’. FOXBusiness. Retrieved from
http://www.foxbusiness.com/markets
Dewey, C. (2017, February 9). Why Whole Foods is now struggling. The Washington Post.
IBISWorld (a). (2017, April 4). Supermarkets & grocery stores in the US: Market research
report. Industry Report 44511. Retrieved from
http://clients1.ibisworld.com/reports/us/industry/default.aspx?entid=1040
IBISWorld (b). (2017, April 5). Warehouse clubs & supercenters in the US: Market research
report. Industry Report 45291. Retrieved from
http://clients1.ibisworld.com/reports/us/industry/default.aspx?entid=1092
Peterson, H. (2017, March 27). Whole Foods is facing its worst nightmare after an
unexpected threat stole millions of customers. Business Insider. Retrieved from
http://www.businessinsider.com
Wingfield, N., & de la Merced, M. J. (2017, June 16). Amazon to buy Whole Foods for
$13.4 billion. The New York Times.
http://www.businessinsider.com/
Note，
This course is Compensation and Benefits
Complete the Case study according to the following requirements
4 page
Case required
Here are the questions/issues from the case study your case analysis should address. Your submission should NOT be a question/answer approach, but rather an integrated case study detailing your analysis and recommendations.
1, Develop a compensation proposal for the CEO that would be competitive with offers from rival firms attempting to lure the CEO away. The compensation proposal should be a “total compensation” package in that it addresses all facets of total compensation (e.g. salary, bonuses, benefits, and perks that are consistent with someone of this stature).
2,Ensure that the company has a successful IPO and that there is continuity in top leadership for the next five years.
3,Align the interest of the CEO with the stockholders of the firm.
4, Reward the CEO for reasonable risk-taking and growth of the firm.
5,Last, the board has come under criticism from employees and die-hard customers who see the company culture moving away from its early “family firm” roots and becoming more corporate. The board is worried that there will be a negative reaction to what might be perceived as an “excessive compensation plan” by some. They would like to know if you have any creative solutions that might help alleviate that criticism.