J.C. Penney Spent $170 Million to Install Johnson Team

May 3 (Bloomberg) -- Ron Johnson’s tenure at J.C. Penney will long be associated with a 25 percent sales plunge. Lost amid the criticism since his departure last month is the $170 million it cost to install Johnson and his top three executives. Sheila Dharmarajan reports on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Ron Johnson’s tenure at J.C. Penney Co. (JCP) will long be associated with a 25 percent sales plunge. Lost amid the criticism since his departure last month is the $170 million it cost to install Johnson and his top three executives.

The sum covers cash payments and restricted stock offerings to the four executives and outgoing Chief Executive Officer Myron Ullman -- and doesn’t include salary or incentive pay, according to public filings. Now after less than a year and a half, former Chief Executive Officer Johnson and his trio are gone, and some are being paid on the way out too. Upon his April 17 exit, Chief Operating Officer Michael Kramer pocketed $2.1 million.

“This is a story of how just tossing money at management doesn’t guarantee success,” Steven Hall, managing director and founder of his eponymous executive-compensation consulting firm, said in an interview.

Joey Thomas, a spokesman for J.C. Penney, declined to comment.

Johnson recruited executives from across the retail industry, including Target Corp., Apple Inc. and Abercrombie & Fitch Co., to revamp the department-store chain. It spent a total of $236 million, including the recruitment of the top four executives, on what it calls management transition costs.

Photographer: Jin Lee/Bloomberg

Former J.C. Penney Chief Executive Officer Ron Johnson received $52.7 million in restricted stock in November 2011 to make up for what he had to leave at Apple. Close

Former J.C. Penney Chief Executive Officer Ron Johnson received $52.7 million in... Read More

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Photographer: Jin Lee/Bloomberg

Former J.C. Penney Chief Executive Officer Ron Johnson received $52.7 million in restricted stock in November 2011 to make up for what he had to leave at Apple.

Mounting Losses

When Johnson’s remake foundered, mounting losses and restructuring costs -- which include the recruitment spending - - helped sink the balance sheet. Now Ullman, who returned as chief executive officer 17 months after Johnson replaced him, has been raising cash.

Investors suffered under Johnson’s leadership, too, as J.C. Penney sank 50 percent. The shares rose 2.7 percent to $17.26 at the close in New York and have risen 8.8 percent since Ullman became CEO on April 8.

The recruitment of marketing chief Michael Francis is emblematic of what J.C. Penney was willing to spend to attract talent. Francis helped cultivate the “cheap chic” brand of discounter Target, where he worked with Johnson in the 1990s. To lure him from Target, J.C. Penney gave Francis $12 million in cash and $32 million in restricted stock in November 2011.

Francis was named president and given the responsibility to lead the overhaul of the company’s marketing. The chain unveiled a new logo, television talkshow host Ellen DeGeneres and themed monthly catalogs. Even as J.C. Penney poured money into brand advertising, sales fell. Francis was fired in June, and Johnson took over his responsibilities.

Photographer: Victor J. Blue/Bloomberg

Birds roost outside of a J.C. Penney Co. store in the Queens borough of New York. Close

Birds roost outside of a J.C. Penney Co. store in the Queens borough of New York.

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Photographer: Victor J. Blue/Bloomberg

Birds roost outside of a J.C. Penney Co. store in the Queens borough of New York.

Termination Agreement

Thanks to a termination agreement, Francis received $4.3 million on his way out. So in about eight months, J.C. Penney spent $16 million in cash on hiring and firing Francis, who in December was named chief global brand officer for DreamWorks Animation SKG Inc. Because he left before the restricted stock vested, he kept about 100,000 of the 1 million shares he was granted, the filings show. Meanwhile, the company cut its workforce by more than 40,000 people during Johnson’s tenure.

Kramer and Chief Talent Officer Daniel Walker, who formed the rest of Johnson’s trio, left the company last month after Johnson resigned. In November 2011, Walker received a signing bonus of $8 million and restricted stock valued at $12 million to join the company from a human resources firm he founded after time at Apple and Gap Inc. Kramer earned $4 million in cash and $29 million in stock.

Lump Sum

J.C. Penney then paid Kramer, who came from apparel-maker Kellwood Co. after stints at Apple and Abercrombie, a lump sum of cash upon his exit and said his stock would vest in accordance with the terms. That means all of it would be his by the end of 2017, according to filings.

The company said in a filing that Walker voluntarily resigned. That means he did not keep his restricted stock or receive any additional payments when he left the company, said Daphne Avila, a J.C. Penney spokeswoman.

Other struggling retailers have recently used signing bonuses to lure executives, yet not to the extent that J.C. Penney did, according to a search of public filings by Bloomberg News.

Sears Holdings Corp. (SHLD), the money-losing department-store chain retailer, hired Ronald Boire away from his CEO job at retailer Brookstone Inc. in January 2012. He was paid a $600,000 signing bonus to become chief merchandising officer of a company with more than three times the revenue of J.C. Penney. Louis D’Ambrosio was paid $150,000 to become Sears CEO in 2011.

RadioShack Corp. (RSH) gave Joseph Magnacca $1 million and 500,000 shares of restricted stock worth about $1.6 million in February to become the third CEO in four years at the chain of more than 7,000 electronics stores. That $1 million is one- eighth of what J.C. Penney, which has about 1,100 locations, paid Walker in cash to agree to head human resources.

Largest Expense

Johnson’s hiring cost J.C. Penney the most. He received $52.7 million in restricted stock in November 2011 to make up for what he had to leave at Apple while Ullman earned $29 million when he left. The board then swapped Ullman for Johnson and gave him a salary of $1 million a year. Johnson, who stepped down, didn’t sign a termination agreement, Avila said.

He’ll receive unpaid salary and vacation as well as the money in a company retirement account, according to the company’s proxy filed on April 2. His restricted stock fully vested in 2012. Avila declined to say whether Johnson will get additional severance.

“If it works, it’s a drop in the bucket,” Hall said of J.C. Penney’s recruitment spending. “If it doesn’t, everyone feels stupid.”

To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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