He could have had any job he wanted. Or he could have stayed at Apple, where he was sitting on $50 million of restricted stock — and, should the company continue its record of innovation, untold millions more in the future.
But instead, Ron Johnson, senior vice president and creator of Apples retail stores strategy, is taking the CEO job at J.C. Penney JCP , a middle-class, middling-performance department store chain — and paying for the privilege of doing so.
Why? In part, its because Johnson, who started his career at Mervyns (later bought by Target TGT ) and moved up the ranks there before leaving for Apple AAPL in 2000, has always dreamed of running a retail company. But theres another reason, too: In addition to being made whole on his Apple stock with $50 million in J.C. Penney restricted stock, a $1.5 million salary, and a target incentive bonus of nearly $1.9 million, Johnson is actually investing another $50 million in stock warrants for 7.26 million shares — a cost of $6.89 per share. He cant sell them for at least six years, and if the stock is at or below $29.92 at that point, he loses his $50 million.
On the other hand, the upside is dramatic: If the stock doubles from today to $60, hell earn over $385 million — in addition to the huge sums he would gain on his restricted stock and other pay. Whats more, because the warrants are an investment rather than compensation, Johnson will be eligible for capital gains tax treatment instead of the ordinary income tax rate. And Johnson is already ahead — J.C. Penney shares shot up 17.5% on Tuesday to $35.37.
Its the ultimate skin-in-the-game move, says Pershing Square Capital Managements Bill Ackman, who owns 16.5% of the company (and, with JCPs market cap rising $1.2 billion on the investment, had quite a lovely afternoon). Rons large investment in the company demonstrates his confidence in the value he can deliver while aligning his interests with shareholders, said a pleased-as-punch Ackman, reached at a caf in Rome, Italy on Tuesday evening. If the stock stays flat, he loses his investment; if he creates shareholder value on a sustained basis, he has the potential to make a fortune.
Its not the first time a Pershing Square investment has used the warrant as a lure for top talent. Last November, Ackman proposed almost the identical structure when David Weinreb became the CEO of The Howard Hughes Corporation HHC , an outgrowth of real estate company General Growth, (Pershing owns 14% of Howard Hughes).
Its not uncommon to see such arrangements in the private equity world, but this is new territory for public companies, particularly vaunted old brand names like J.C. Penney. The downside for shareholders? The nearly 4% dilution from Johnsons investment and the restricted stock. The upside? Well, if Johnson lives up to his reputation as a retail genius of unparalleled talent, they may not much care about anything else.
The market says the guy we hired is worth $1.2 billion, says Ackman. The market is wrong; hes worth way more than that.”
