Tuesday 21 May 2019

Online fashion retailer Zalando set to ignite European CEO pay scales

A trio of German millennials could become Europe's highest-paid executives and upend their own country's corporate culture in the process, write Stefan Nicola and Richard Weiss

The Berlin HQ of Zalando – Europe’s largest online fashion retailer - which sells €5bn a year worth of apparel from Adidas, Nike, Hugo Boss, and others in 17 countries. Photo: Bloomberg
The Berlin HQ of Zalando – Europe’s largest online fashion retailer - which sells €5bn a year worth of apparel from Adidas, Nike, Hugo Boss, and others in 17 countries. Photo: Bloomberg

Thrift and discretion have traditionally been seen as virtues in Germany - even in executive suites. Companies long resisted publishing individual compensation of top managers, whose pay is often a fraction of what many of their global peers receive. German CEOs rarely get more than €10m annually.

Volkswagen paid its CEO around €8m last year, less than half the $22m (€19.5m) Mary Barra made at General Motor, even though VW's sales are almost twice the size of GM's. And on average, German leaders earn 97 times as much as employees, versus 312 times as much at the biggest US companies, according to the Economic Policy Institute in Washington.

Yet a trio of German millennials could upend the status quo - and become Europe's highest-paid executives in the process.

Zalando's three co-CEOs - Robert Gentz, David Schneider, and Rubin Ritter - stand to rake in a combined €507m if they can more than triple the share price and roughly double the sales generated by Europe's largest online fashion retailer within five years.

While that's a huge upside, the downside is equally striking: If the managers fail to meet the ambitious targets, they'll each have to make do with pay of just €65,000 a year.

Berlin-based Zalando's package is "a revolution and a total exception in Germany," says Heinz Evers, a consultant who advises companies on executive pay.

Germany, like the rest of Europe, trails the US in another regard: the number of young tech successes like Zalando.

Other than corporate-software maker SAP, it has no global tech giants to compete with the likes of Amazon, Apple, Alphabet, or Facebook.

Instead, the DAX benchmark index is filled with manufacturing, finance, and chemical companies that have been around for decades or even centuries, often with strong family ties.

Ritter, who already collected €20.2m last year under two previous incentive plans, says the Silicon Valley-style pay package was created to promote the growth and risk-return mindset found among executives at entrepreneurial companies. While many tech entrepreneurs aim to get rich by selling their companies, he and co-founders Gentz and Schneider say they're pursuing a different route. "Jeff Bezos hasn't called, and Jack Ma hasn't, either," says the 37-year-old Ritter, referring to the CEO of Amazon and the Alibaba chairman.

"We're not building the company with the purpose of getting acquired."

The co-CEOs have pledged to triple the value of clothes sold on Zalando's platform to match the sales of Hennes & Mauritz, the Swedish apparel chain whose H&M stores anchor shopping strips from Boston to Beijing.

Yet the German company wants to reach that goal without going outside economically stagnant Europe, bypassing the world's biggest ecommerce markets: the US and China.

The strategy sounds contrarian at a time when Amazon and China's Alibaba are expanding in fashion, with the US giant pushing aggressively onto Zalando's European turf.

While internet companies such as Google and Facebook benefit from their global reach, Ritter figures it's better for ecommerce sites to focus regionally. Even Amazon has ceded China to Alibaba and rivals including JD.com.

"Europe is big enough to build a €20bn fashion company," says Ritter, sporting the backpack, sneakers, and jeans favoured by Berlin's new breed of tech entrepreneurs. Large brands "want to build their next store on the street with the most traffic, and Zalando is the street with the most traffic they've ever seen".

The company has marked its ambitions with a new headquarters near the East Side Gallery, a mural-covered remnant of the Berlin Wall.

The complex has many of the trappings of California tech titans' campuses, including a kindergarten, a yoga studio, and a rooftop basketball court.

Zalando, which grew popular in Germany with the help of TV spots featuring female shoppers screaming with joy when a postman delivers the company's packages, already sells €5bn a year worth of apparel from Adidas, Nike, Hugo Boss, and others in 17 countries, processing an average of 370,000 orders each day.

The company is expanding its Amazon Prime-like Plus programme, which includes personalised style advice, and looking to extend its reach into more countries in Eastern Europe,

Ritter says. He also hopes to cut down on costly returns - half of sales are sent back - by using data on sizes and customer preferences more effectively.

To boost sales in its current markets, Zalando aims to increase its lineup of big brands by expanding a programme that lets them build their own virtual stores on the platform, with control over inventory, images, and pricing.

Zalando gets a commission from those sales, which are less profitable for the company than those of its own retail operation, where it buys clothes in bulk from suppliers and sells them through its online shop.

The company is betting it can boost profits by selling fulfilment and other support services to more partners.

The co-CEOs will reap the full payout only if Zalando has annual average sales growth of more than 15pc for the next five years and the share price more than triples, to €144.58.

That could turn out to be a high bar. In the third quarter of 2018, Zalando's growth was the slowest since it went public in 2014, though it's since picked up. Meanwhile, local online fashion rivals are mushrooming, including Otto Group's AboutYou, a Zalando clone.

Germany's tradition of worker representation on boards probably means Zalando-style packages are unlikely to spread quickly through the country's biggest companies.

There's also a growing backlash against high CEO pay globally, with Abigail Disney, whose grandfather and great-uncle founded Walt Disney, recently calling CEO Bob Iger's $65.6m compensation package "insane".

Still, more German companies are linking long-term pay awards to share-price gains and taking other steps to reward performance.

Members of executive boards - comprising the top managers of German companies, rather than outside advisers - earned 71 times the average pay of their workers in 2017, up from 42 times in 2005, according to the Hans Boeckler Stiftung, a research organisation funded by Germany's trade unions. The Zalando executives' deal is just the most extreme example of this trend.

"It's a remarkable compensation package for Germany," says Hans-Joachim Boecking, a business professor at the Goethe University Frankfurt. "You can see the ground shifting."

Bloomberg Businessweek

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