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How Shareholders Could Force Chipotle to Lower Co-CEOs' Pay

Chipotle's (NYSE: CMG  ) annual meeting looks set to court controversy over excessive pay. The California State Teachers' Retirement System (CalSTRS), the Florida State Board of Administration, and the American Federation of State, County, and Municipal Employees (AFSCME) Pension Plan have all disclosed that they will vote against executive pay at the annual meeting on May 15.

Companies are required each year to propose a resolution, known as Say on Pay, to seek shareholder approval of the way the CEO and other executives are paid.

Not only that, but both major proxy advisory firms – Institutional Shareholder Services and Glass Lewis, who advise large shareholders on how they should vote – have also recommended that their clients oppose executive pay at the company. As I wrote earlier, another shareholder group, CtW, had already written to the SEC complaining about pay at the company.

Pay not linked to performance

Normally companies come under fire for excessive pay because they are performing badly. And indeed, all of the shareholders and advisory firms criticize Chipotle for what they call a pay-performance disconnect, as well as excessive use of equity.

But Chipotle's performance has not been poor. Over the last five years, the shares have risen from around $80 to over $600, before dropping back to just over $500 today.

However, Chipotle employs two co-CEOs, founder Steve Ells and Montgomery Moran, so even if they weren't paid excessively, they would still cost twice as much as a normal CEO.

In 2013, the two earned a combined $93 million, including large stock option profits and around $20 million each in performance shares. And despite being founders of the company who already own just over 1% of outstanding shares each, the compensation committee awards them stock option and other equity grants annually at considerable cost to shareholders.

The shareholders are additionally opposing a request by the company to increase the number of shares it can award executives, because of costs. In contrast, at many companies, such as Microsoft (NASDAQ: MSFT  ) , founders do not receive any equity awards at all because they are already effectively aligned with shareholders.

Excessive perks

While institutional shareholders get irate about the pay-performance disconnect, retail shareholders can get even more angry about excessive perks. There are plenty here. As I wrote earlier, for some reason the company is paying for schooling for CEO Moran's children. In addition, the company pays income taxes on perks for all executives, including the two CEOs. Three executives receive special housing expenses, and CFO Jack Hartnung, despite being with the company 12 years, receives commuting expenses between his "home" and company headquarters.

Chipotle has already experienced significant disapproval of its Say on Pay proposal in previous years. With this level of opposition announced before the annual meeting, the outcome of the vote may be a foregone conclusion.

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  • Report this Comment On May 15, 2014, at 10:39 AM, SHFriendly wrote:

    Chipotle took the unusual step of suing McRitchie and Young in Denver Federal Court in a failed attempt to keep this proposal off today’s ballot.

    Proposal F

    An Advisory Vote On A Shareholder Proposal Requesting Chipotle To Adopt Simple Majority Voting

    Sponsored by James McRitchie and Myra K. Young.

    Chipotle v. Chevedden [McRitchie and Young]: Colorado District Court Grants Defendants' Motion to Dismiss for Lack of Jurisdiction

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Paul Hodgson

Paul Hodgson is a freelance journalist and independent commentator on corporate governance as well as conducting contract work for governance research firm BHJ Partners. He was formerly The Corporate Library’s and then GMI Ratings’ Chief Research Analyst for board and executive compensation, and its most prolific author. Mr. Hodgson has been researching and writing about executive compensation for over 20 years, eight of which were spent in England, where he worked for the Incomes Data Services journal Management Pay Review as researcher and assistant editor. He is a prolific blogger and the author of numerous books and research reports on executive pay and has also had articles published in a number of journals, including ‘Forbes’, ‘Business Week’, ‘Responsible Investor’, ‘Directorship’, ‘Ivey Business Journal’, and ‘Directors and Boards’. Mr. Hodgson is the author of the book Building Value Through Compensation, published by CCH Publishing. He is widely quoted in national print media as an authority on executive compensation, and has appeared on numerous television and radio stations. Google

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