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Chipotle's Shame



May 19, 2014 – Comments (1) | RELATED TICKERS: CMG

Board: Macro Economics

Author: Goofyhoofy

As has been reported, Chipotle now has the dubious distinction of having the highest shareholder vote of the year against their executive compensation practices, which have awarded more than $300 million to the company's co-chief executive in recent years. More than 75% of votes were in the "no" column when tallied on the so-called "say on pay" measure.

That is a stunning rebuke, especially given the growth of the chain over that period, and the tepid reponse the last time around, when only 27% of shareholders voted "nay."

But $50 million a year? $300 million over just a few years? Personal paid use of the corporate jet, and taxes paid on even that imputed income? Those co-CEO's own less than 1% of the company, so these days they're employees, not owners. One can just imagine Ben Graham or Warren Buffett, who rightly view shares as ownership of the company saying "Wait, you want a salary of $50 million? Guys, it was a great idea. You started well, but then you sold the company! You chose to take your benefit. If you want to continue to reap those rewards, you should still own it. You don't."

Ray Kroc became fabulously wealthy, but that was because he kept sizable ownership stakes in McDonald's, the company he bought and groomed throughout his life. Sam Walton, Bill Gates, Warren Buffett, even Dr. Dre grew their wealth because they started well, but also owned and kept significant stakes in the companies they founded. They may have done even better along the way, but at least they had skin in the game and that's why few people chide them for their great wealth.

Chipotle's executive compensation costs are about five times the (quick serve) industry norm. If a comparison helps, Chipotle's top five execs earn 42% more than Coca-Cola's executive team on sales that are a small fraction, and it's worth remembering that Coke just went through its own executive compensation outrage moment, so this is a stunning comparison indeed. A Bloomberg Businessweek analysis demonstrates that Chipotle has one of the worst pay-for-performance profiles in the Russell 3000, and that's based on past performance, not the future proposal.

Sadly, this "no confidence vote" is non-binding, but with a little luck and more publicity, perhaps the compensation committee can be bludgeoned into reevaluating how they're doing their job. And perhaps other compensation committees around the corporate board rooms could take a lesson too?

It's far too soon to call a trend, but Domino's shareholders recently voted 25% against executive pay proposals, and at least some Citigroup shareholders are advising a vote against executive pay there, as well. (It may be remembered that in 2012 shareholders voted against a $15 million pay package of then CEO Vikram Pandit. He was later forced out by the Citi board after the company’s performance continued to worsen.

One of the features hotly debated of the Dodd Frank legislation was its potential impact on outrageous executive compensation. It hasn’t been much, but the provision calling for say-on-pay, while inadequate and non-binding, seems to be a start, at the very least. 

1 Comments – Post Your Own

#1) On May 19, 2014 at 7:17 PM, valunvesthere (22.89) wrote:

The high price of talent and ways of keeping it. My opinion is everybody wants to get paid well for doing good work and in the world where shareholders decides if executives get raise or not is controversial just as governments and public servants vote themselves for a raise. But the truth is there's abundance of unfairness where there are times executives don't deserve a raise gets it and other times where executives deserve a raise and shareholders vote against it. In this case the shareholders at Chipotle Mexican Grill recognizes talent and in keeping it voted in for executive raise

Not long ago Noodles & Company was compared to and going to become the next Chipotle Mexican Grill of oriental noodles. If my memory serves me correctly there were a fair share of agreements and disagreements in the fool community. A good example of a difference (between the two) is executive compensation as listed below (courtesy of Yahoo Finance).

Chipotle Mexican Grill, Inc.

Key Executives                                                         Pay    Excercised

Mr. M. Steven Ells , 49                                           
Founder, Chairman and Co-Chief Exec. Officer      4.85M 41.72M

Mr. Montgomery F. Moran , 47
Co-Chief Exec. Officer, Pres, Sec. and Director      4.13M  1.70M

Mr. John R. Hartung , 57
Chief Fin. Officer and Principal Accounting Officer 1.80M  9.42M

Mr. Mark Crumpacker , 51
Chief Marketing & Devel. Officer                             1.02M  5.82M

Alex Spong ,
Investor Relations Director                                          N/A      N/A


Noodles & Company

Key Executives                                                       Pay        Excerised

Mr. Kevin Reddy , 56
Chairman and Chief Exec. Officer                          2.22M     0.00

Mr. Keith Kinsey , 60
Pres, Chief Operating Officer and Director             1.29M     0.00

Mr. Dave Boennighausen , 36
Chief Financial Officer                                          403.00k    0.00

Ms. Kathy Lockhart , 50
Principal Accounting Officer, VP and Controller         N/A      N/A

Mr. Paul Allen Strasen , 58
Exec. VP, Gen. Counsel and Sec.                              N/A      N/A


If Noodles & Company ever becomes the next Chipotle Mexican Grill, I believe the executives of Noodles & Company would expect the same from its shareholders.  


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