Cheap Talk

ST. PAUL, Minn. -- It's hard to find a corporate titan as frugal as Robert A. Kierlin. The 62-year-old chairman and chief executive of Fastenal Co., the nation's biggest specialty retailer of nuts and bolts, is tightfisted with both his and shareholders' money.

Mr. Kierlin owns three used suits, clips grocery coupons and drives a Toyota. Last year, he halved his $120,000 Fastenal salary because his additional duties here as a Republican state senator were taking more time. He has never received a bonus, restricted shares or stock options since Fastenal went public in 1987.

Robert A. Kierlin

At its Winona, Minn., headquarters, Mr. Kierlin lacks a personal secretary, private dining room or even an assigned parking space. He usually shares a motel room with a colleague during business trips. No wonder he once won INC magazine's hunt for the cheapest CEO in America.

Most amazing of all, the Fastenal co-founder intends to give away more than two-thirds of his 3.9 million shares in the company over the next five years. His 10.3% stake recently had a market value of about $300 million. He will shed the stock through an innovative stock-option plan that could enrich thousands of Fastenal's 6,530 employees and his favorite educational foundation -- without diluting investors' holdings.

Mr. Kierlin is definitely unique and his option plan unusual, says Carol Bowie, director of governance research services at the Investor Responsibility Research Center, a Washington group that monitors CEO pay at 2,000 big and midsize companies. But pay trackers like Ms. Bowie also wonder how Fastenal managed to attract and retain talent when it gave no one options until Mr. Kierlin started his program in January 2000.

Is it farsighted or foolhardy to be a frugal CEO? Mr. Kierlin, a self-effacing man who prefers short-sleeved white shirts, offered insights during a frank chat in his tiny legislative office near Minnesota's state capitol. Excerpts follow:

The Virtue of Thrift

The Wall Street Journal: Do you like being known as the country's most frugal CEO?

Mr. Kierlin: I never said I liked it -- and have never really done it consciously to make any list. When you start a business from scratch, it is a struggle to get it going. You are not taking much money out. The more you can keep everything building, the better off you are going to be in the long run. Learning the advantages of compound interest has worked very well for us.

I was born into a family that never had an awful lot of things. We just learned to live with what we had. I never felt I needed a lot of money.

WSJ: Do many Fastenal people make more than your current salary of $60,000?

Mr. Kierlin: Last year there were over 300 such people. Some are making good money because of their performance. It is not that if you are higher in the hierarchy, you make more money. You will find store managers that make more than their district managers.

WSJ: Doesn't that hurt morale?

Mr. Kierlin: No. Everybody has an opportunity to do better. Generally, we don't do annual bonuses. I learned back in school that bonuses and any profit sharing are meaningful only if they are as close as possible to the actual performance. You try to do them monthly or, in the worst case, quarterly.

WSJ: Why haven't you gotten any bonuses?

Mr. Kierlin: I haven't really needed anything. Honestly, being a big shareholder, the best advantage to me is to always have the value of the company's stock go up. After a while, why do you need more money?

WSJ: Then how can you call yourself a CEO?

Mr. Kierlin: Well, you get all the tax forms sent to you. The states, the cities, they just want to deal with the CEO. I just pass those forms on to somebody else anyway. That's the fun part of being CEO. Nobody can pass stuff back to you.

WSJ: Aha! So there is some reward for you in being a CEO. Is it also part of your and Fastenal's philosophy that you needn't spend a lot to be happy? Is that why you buy used suits?

Mr. Kierlin: One of the five original founders of Fastenal had invested in a clothing store. The manager was my size. Every season, he would change his wardrobe and sell the old season's suits at one-third of the price. They were $60. Those are opportunities that come up. Why not take advantage of them?

WSJ: Is that also why you stay in low-priced motels during business trips? Do such practices really keep costs down?

Mr. Kierlin: Yes. It sends a message that we are not wasting anything. We do buy good equipment when we need it. But we won't spend money on things like desks and furniture and shelving for our stores.

WSJ: Your frugal culture, also evident in your compensation practices, helped Fastenal generate fantastic results for years. But it didn't keep your earnings from dropping last year.

Mr. Kierlin: The main reason that our earnings did drop last year is that we were opening 128 stores. That's a considerable expense. But those stores will make money for us two years after they open. We still operate with a very high return on assets.

WSJ: I suspect your pay package differs radically from those awarded other corporate leaders, not just because of Fastenal's culture but also because you are such a large shareholder.

Mr. Kierlin: If a CEO did not own a great deal of shares, this model would not work. But if the CEO had a plan which tied compensation to the performance of the company, it might still work.

Giving People Options

WSJ: How did Fastenal thrive as a publicly held company without any options until recently?

Mr. Kierlin: We don't hire high-priced people because we develop our own people internally. We have retained them by giving them an opportunity to grow. When you take somebody coming out of school starting with $25,000 to $30,000 a year pay and show them that they can make $100,000 to $200,000 a year by growing with us, that's a pretty good incentive. And knowing that they are not going to be superseded by somebody else hired from the outside.

Also, our people have some way to have ownership of the company. When we went public, that was one of the three reasons.

WSJ: Was that your rationale for the option plan as well?

Mr. Kierlin: We had to find a way of doing that and staying consistent with our policy of not diluting the stock.

When we went public, the five original founders put together stock they owned and gave each employee 50 shares. About two years later, I did it again with just my own stock. Just under $600 worth of stock for each employee. But the mechanics of that got increasingly difficult.

WSJ: There has been a lot of hue and cry lately because some senior executives exercised options and sold shares just before their employer fell on hard times. People are having second thoughts about their love affair with stock options. Given this disenchantment, how do you justify your plunge into options?

Mr. Kierlin: We are not plunging into them. This is a very limited stock-option plan. We try to put it out as far as seems reasonable. Everybody who is a store manager and above is eligible, except for four top executives. Or, if you have been with the company for at least three years -- including part-timers. We don't believe in giving special benefits to just certain people in the hierarchy.

WSJ: Why did you decide to use only your shares for the option grants?

Mr. Kierlin: I knew that eventually my shares were going to go to a foundation anyway. So why not use those shares now and not have to dilute any shares through option exercises?

WSJ: By first donating your shares designated for the option plan to Hiawatha Education Foundation, which you helped create, the proceeds will go there when employees exercise their options and purchase stock. Was that your idea?

Mr. Kierlin: I wouldn't take credit for the whole thing. I just wanted to get the money to the foundation.

WSJ: When can employees start exercising options?

Mr. Kierlin: From the 2000 plan, 557,600 options are exercisable in July.

WSJ: Including subsequent awards in January 2001 and this past January, Fastenal has granted 1.25 million options based on your pledged personal holdings, right?

Mr. Kierlin: Yes. I figured that if I do about one million every 2½ years, I can do it for 10 years.

(Editor's note: Following the latest award, there now are 2,616 employees with an average of 470 options each. No grant can be exercised for 30 months. Mr. Kierlin will transfer shares to the foundation just before each exercise date.)

WSJ: Why stop after 10 years?

Mr. Kierlin: I run out of stock.

WSJ: So by July 2007, you will have given away about 2.8 million of your 3.9 million shares for employees' use as options, right?

Mr. Kierlin: Yes.

Greater Motivation

WSJ: Why didn't you give options to every full-time and part-time employee irrespective of longevity, as you did when you handed out stock?

Mr. Kierlin: You have a lot of hires who don't stay beyond that first year. That's where we have our biggest attrition rate. It is very difficult to get that down. Too many people who don't know what our company is about get hired and decide to do something else. We still lose about 20% in the first year.

WSJ: How did colleagues react when you announced the option plan? Especially since it was so at odds with the company's cash-focused compensation practices?

Mr. Kierlin: District managers and store managers really appreciated having the chance to participate. It was widespread enough that most people that didn't get options knew that in another year or two, they would be moving into a position where they would be eligible.

I got a couple of thank you's in the halls and e-mails. They said, "This is really a nice thing you are doing for us. It is really going to make a difference." The implication was they were going to work harder now.

WSJ: Weren't they already working hard enough -- and for not a lot of rewards either? For instance, does Fastenal still refuse to reimburse staffers for meals eaten on the road?

Mr. Kierlin: It is generally true. Although we allow the regional managers to really make the decision for their own region.

WSJ: So exceptions can be made. Is that also the case for people sharing motel rooms?

Mr. Kierlin: We all avoid the one or two people we know are snorers.

WSJ: Is one of them Bob Kierlin?

Mr. Kierlin: I have been known to do a little of that.

WSJ: Does that mean you sometimes get to stay in a room alone?

Mr. Kierlin: When I travel as a threesome, I get to have a separate room.

Staying Power

WSJ: With about 40% of your current staffers holding options, do recipients work harder as they promised?

Mr. Kierlin: An institutional holder does check our branch stores. We are hearing that attitudes out there are more positive than a couple of years ago. That is also showing up in our retention rate.

Our competition is always trying to hire our store managers. Because we have development programs. Just about everybody in our organization at store-manager level or above has received an offer from somebody else. They always involve more base salary. Maybe some of these things like options influence their decision to stay.

(Editor's note: Turnover among store managers fell to 17.6% last year from 20% in 1999, another Fastenal official says.)

WSJ: Do you get a generous write-off for donating your option-program shares to the Hiawatha Education Foundation?

Mr. Kierlin: I am eligible for a write-off. But because of other gifts of appreciated stock that I have made over the years, I probably have as many years' carry-forward as you can use for my income. I really don't get any tax benefit unless I live to be 150.

WSJ: Why did you create that foundation?

Mr. Kierlin: The Hiawatha Education Foundation was one of the reasons we went public. As a small corporation, we allowed each of the five founders to designate a portion of the contributions that the company was making each year based on what percentage of ownership they had. All of us were making donations to educational institutions.

From the five of us, there was only one whose parents had a college degree. We had been given a lot. The reason we were able to do the original investment at Fastenal was we had all graduated and we didn't have student loans and saved a little bit of money. So we could invest in a business. We would like to give other kids the same chance.

WSJ: Are you the biggest donor of the five?

Mr. Kierlin: Yes. We are primarily interested in Catholic schools around the Winona area. The biggest project we took on was purchasing a closed college campus, the former St. Teresa College campus. We set up a subsidiary called St. Teresa Campus Schools, and we renovated the buildings, installed Cotter High School there and started a math-science academy there. The academy involves high-school kids getting college credits for math and science.

Cutting Bonuses

WSJ: Let's turn to pay cuts, another hot topic. Many companies have eliminated bonuses or reduced salaries. At some, the pain is being shared from top to bottom. After your earnings dropped last year, what percentage of people saw their monthly or quarterly bonuses fall?

Mr. Kierlin: Of those who were eligible, I would guess 75% of them.

WSJ: How do you keep up morale up when bonuses fall?

Mr. Kierlin: In our industry, since we are one of the few companies that had positive sales growth last year, morale stays high because everybody knows that times are really difficult out there. We haven't had any layoffs.

In terms of actually taking a pay cut, I only know of two -- mine and our president and chief operating officer [Willard D. Oberton]. He took a cut because he realized that other people's bonuses were going to be down.

(Editor's note: Fastenal says Mr. Oberton cut his $300,000 base salary by $50,000 a year in June, but the cut totaled only $10,000 through August, when he became president and regained his old pay level.)

WSJ: And why did you halve your salary early last year?

Mr. Kierlin: I did it right after this legislative session started up here. I knew I wasn't going to be spending as much time at Fastenal. It was the first session where I would be here for the long session from Jan. 3 all the way to the end of June.

(Editor's note: Mr. Kierlin makes about $31,000 a year as a part-time lawmaker.)

WSJ: Once your earnings fell, you saw no reason to cut your salary any further?

Mr. Kierlin: I couldn't go much further and still show something!

I don't think it is fair for executives to expect people underneath them to take any kind of cut in pay unless they themselves take at least a portion of it.

Insider Pay

WSJ: Turning to director pay, I was surprised to see how Fastenal compensates its board members, in light of your more innovative employee pay practices. Since 1996, you have made between $1,000 and $2,500 a year for being an inside director. At the same time, you and two other inside directors decide executive officers' pay. These practices are considered bad corporate governance. What's the rationale?

Mr. Kierlin: Insiders get paid $1,000 a year now. We still do that, subject to change, because we don't maintain officers' and directors' insurance. It has always looked like it was too expensive for the amount of coverage that you got. Plus we didn't really think we had an awful lot of exposure.

WSJ: So you felt you needed to give inside directors something to cover the cost of buying their own insurance policies?

Mr. Kierlin: Yes. They are covered somewhat under their homeowner's policy.

WSJ: The board has three insiders who also vote on rewards for themselves. There is no independent decision here. Why?

Mr. Kierlin: It is always a strange part of the meeting. Because the outside directors are saying, "You should take more." And the insiders are saying, "We don't need it." It is somewhat absurd, but that's the way it works.

WSJ: In our post-Enron world, what changes would you advocate in executive-pay practices?

Mr. Kierlin: Each company should do a better job of developing its own leadership. This idea that you have to go outside to find new executives all the time is just counterproductive.

That is what is creating a lot of these compensation problems.

WSJ: Looking ahead, do you represent the vanguard or a dying breed of frugal CEOs?

Mr. Kierlin: Companies are moving in the direction of being more centered on seeing the power in people. To the extent we are capable of unleashing the talents people have, you will see more organizations work under that idea.

How they do it depends on the chief executive being a quirky guy like me -- or a standard person.

--Ms. Lublin, the careers news editor for The Wall Street Journal in New York, served as contributing editor of this report.

Write to Joann S. Lublin at joann.lublin@wsj.com

Updated April 11, 2002