Chipotle's Challenge, CEO Pay, and Those Darn Awesome Cups

Chipotle Mexican Grill (NYSE: CMG  ) doesn't just provide delicious burritos that make its heady sales and profits run. It is also a huge force in sustainability and education about where our food comes from. The company doesn't rely on traditional marketing. Instead, it embraces unique ways to spread its "Food With Integrity" ways. See: its Cultivate Festivals, the Scarecrow social media campaign, sponsorship of films like Food Inc., and its more recent Farmed and Dangerous show.

Now the burrito giant has revealed a wonderful initiative that displays a similar focus on underserved areas that many of us believe in strongly. Its cups will feature short works by well-known authors.

It's odd, though, that the literary cup news arrived on the scene on the exact same day that we learned about an epic fail despite the many victorious aspects of the business.

A landslide number of investors voted against Chipotle's CEO pay. To be difficult and critical, as I sometimes like to do, I've got some questions. In some ways, might the architecture of Chipotle not only boost growth and goodwill but have world-changing impacts, too?

Is their leadership worth every darn penny?

It's high, all right
The truth is, Chipotle co-CEOs Steve Ells and Monty Moran do rack up the kind of pay that many would drop in the top tier of insanely "overpaid," regardless of insane stock and business growth in recent years. Together, their total compensation added up to $50 million last year alone.

Chipotle's proxy statement also reveals some crazy perks. Although these are tiny dollar amounts in the grand scheme of things, paying for schooling for executives' children with shareholder money is a real bone of contention for anyone who wants to change corporate-governance policies for the better.

However, Chipotle's SEC filings underline what is probably an important point, to management's and directors' perspective for the worthiness of retaining talent, anyway (emphasis mine):

Our Chairman and co-Chief Executive Officer Steve Ells founded our company, has been the principal architect of our business strategy, and has led our growth from a single restaurant in 1993 to over 1,500 restaurants today. Monty Moran, our co-Chief Executive Officer, and Jack Hartung, our Chief Financial Officer, have also served with us for several years and much of our growth has occurred under their direction as well. We believe our executive officers, each of whom is an at-will employee without any employment contract, have created an employee culture, food culture and business strategy at our company that has been critical to our success and that may be difficult to replicate under another management team. We also believe that it may be difficult to locate and retain executive officers who are able to grasp and implement our unique strategic vision. If our company culture were to deteriorate following a change in leadership, or if a new management team were to be unsuccessful in executing our strategy or were to change important elements of our current strategy, our growth prospects or future operating results may be adversely affected.

As much as in many companies' cases the "retaining talent" argument is silly, I do think there's a point at which new management just might not get it. However, in another BS-detector aside, founders and managements who "architect business strategy" rarely want to leave. Passion is at play.

Gutsy CEOs
Say-on-pay votes are non-binding. Managements and boards of directors don't have to do or change anything at all. However, more and more companies are responding to negative shareholder votes, even when votes against their policies don't even stack up to a majority.

However, ignoring shareholder feedback casts managements in a poor light. Going public does mean having shareholder capital and a group of people who deserve a voice.

Here are some examples of gutsy CEOs, though, and it isn't displayed through their millions and billions in pay. They probably get less credit because to the media and shareholders, it isn't that interesting or worth voting against.

Some CEOs have made stands in the past to voluntarily reduce their pay or remain in the modest range of their industries and the prevailing pay schemes.

  • Berkshire Hathaway's (NYSE: BRK-A  ) Warren Buffett makes peanuts. In 2013, his base salary was $100,000. Even counting the calculation of total compensation, he received less than $500,000. Charlie Munger's entire salary was $100,000. In an interesting aside, executive compensation is on page 9 of the proxy statement. It doesn't need much burying.
  • In 2006, Whole Foods Market's (NASDAQ: WFM  ) John Mackey decided he didn't want to work for money anymore. Any money. He even rejected stock-based compensation (one of the tricky things about most CEOs who receive those $1 salaries).
  • Kinder Morgan's (NYSE: KMI  ) Rich Kinder makes a buck. Again, a literal buck. He receives no bonuses, no stock options, nada. He reimburses the company for his health-care expenses. His pay package is at his request. In other words, he simply told the board that is what he wants to do.
  • Morningstar (NASDAQ: MORN  ) CEO and founder Joe Mansueto views his pay in a similar vein. Mansueto's total compensation last year: a whopping $105,000.

These individuals aren't hippies who don't understand or care about economics. These are individuals who have done quite well through the companies they've founded. In some cases, maybe they do feel that the passion for the companies they've created is the real reward.

It's gutsy to save shareholder money by making voluntary decisions to preserve shareholder capital. It's gutsy because hardly anybody else in corporate America does this, much less thinks this way. For CEOs who are all about the boatloads of cash, it doesn't work in their benefit since many of them sit on boards of directors, in compensation committees crafting pay packages that float all the boats.

Getting a read
Even though I'm a shareholder who is continuously awed with the wonderful things about Chipotle -- the literary endeavor is one of those things -- it comes with enough corporate-governance negatives that I do feel disappointed. And that may be a nice way to put it.

Obviously, 77% of shareholders are furious about Ells' and Moran's pay packages. It doesn't help that more and more often, fast-food companies' rock-bottom worker pay puts a highlight on the other side of the company's employee spectrum.

Given some of the amazing stakeholder-friendly and holistic policies that make up part of the company's mission, they've left themselves open to be considered hypocrites. I feel bad when great companies leave themselves open to criticism that is by no means irrational. I feel especially bad about it when I'm a shareholder.

I can't wait to read some of Chipotle's literary cups while I enjoy my tasty burrito bowls, many of which will involve Chipotle's new sofritas.

However, I also can't wait to see what comes of this situation. Who knows. A management with lofty ideals may change the course of one area in which they look like almost everybody else.

Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.


Read/Post Comments (18) | Recommend This Article (23)

Comments from our Foolish Readers

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  • Report this Comment On May 20, 2014, at 3:52 PM, damilkman wrote:

    I think there are a bunch of different topics that get munged together. The first is compensation and who should get it. I think it is disingenuous to call Buffett gutsy when he is worth tens of billions. We can go back to a biblical story where Jesus commends the widow for donating a copper to the temple. The widow gave from her want. A few tens of millions means nothing to Buffett.

    The second comes down to compensation. So back to Guns Germs and Steel I'm going to talk about Sports. I live in the Detroit area. There are a number of sports stars who make tens of millions of dollars. Two of them Calvin Johnson and Miguel Cabrera are considered the best at their position for this generation. Not for a moment would I expect them to take a pay cut or expect any less of their salary considering their talent. When Prince Fielder got shipped out of town I did not mind because the GM realized that his salary was not justifying his value.

    So lets get back to value. A CEO is just like any other employee. The individual is looking to maximize their value. I do not work for free either. I certainly would hope you would not expect me in the name of ethics to work for my company for nothing so the shareholders could benefit. Now if I owned several billion dollars in the company work for I may feel that a salary is not necessary. As long as performance is equal to compensation I have no problems.

    Now I work in a field where the annual industry loss rate is about 11% due to employees leaving. It is a hot market. Management can decide who they will pay more to retain verses the employees who can find better compensation elsewhere. I see a CEO as no different. If a CEO is overcompensated I see that as no different then a bad company that overcompensates their employees. That is the BOARDS job to communicate the value they see in an employee to the share holders. If the share holders feel that strongly they can record their ire by no longer holding a position in the company and driving the price down.

  • Report this Comment On May 20, 2014, at 6:01 PM, CashRulez wrote:

    At the Berkshire meeting this year, someone asked Charlie and Warren about making their top managers salaries public. Warren responded by stating something to the affect of corporate CEO's would be paid a lot less had they not known what their peers were making and that American shareholders are paying a high price for transparency in the proxy statements. Charlie added that they don't want to "add to the culture of envy."

    I always thought that the more transparency the better but their comments made me think. Would taking executive compensation out of proxy statements actually bring down total executive compensation? I don't know if it would have stopped Chipotle but it seems to make sense in theory. However, I don't think shareholders or the SEC would be open to the idea.

    Alyce - would love to hear your thoughts.

  • Report this Comment On May 21, 2014, at 3:19 AM, turb0kat wrote:

    In 1992 executive compensation the SEC required clear disclosure of executive compensation in proxy statements. And you can see the results here:

    http://en.wikipedia.org/wiki/File:CEO_pay_v._average_slub.pn...

  • Report this Comment On May 21, 2014, at 10:31 AM, damilkman wrote:

    In response to cashRulez and turbokat they make a very good point. Is it possible to state that CEO compensation has only risen to its natural level because the lack of information made it difficult for CEO's to shop their wares for the greatest value?

    Using the sports analogy it appears that the perception of most boards is that capable CEO's are lacking. Thus to attract a good one compensation must be increased. If Welch or Buffet types were a dime a dozen I would imagine CEO compensation would be much less as boards would not feel compelled to offer such pricey offers.

  • Report this Comment On May 22, 2014, at 10:09 AM, axz055 wrote:

    While the argument that it may be difficult to find and retain executives who are on board with Chipotle's vision does make some sense, the converse also has to be considered. How likely is it that the founders of the company are going to quit just because they don't get a massive raise almost every year? (Ells' and Moran's compensation is up ~300% from 2009 to 2013) Do they still support the company's vision, or are they just in it for the money?

  • Report this Comment On May 23, 2014, at 10:43 AM, jdo wrote:

    Morningstar CEO makes only 105K a year, LOL what a joke. Do a little digging and you will see he owns a majority stake of the stock (over 24 million shares) so he makes over 16 million a year in dividends alone.

  • Report this Comment On May 25, 2014, at 11:11 PM, anasianjew wrote:

    "Instead, it embraces unique ways to spread its "Food With Integrity" ways. See: its Cultivate Festivals, the Scarecrow social media campaign, sponsorship of films like Food Inc., and its more recent Farmed and Dangerous show."

    Oh Rly!?!?! I didn't know that flagrant propaganda was considered "a unique way to spread its 'Food with Integrity ways". To me, it seems like they have employed old hatchet job tactics to pummel competition.

  • Report this Comment On May 25, 2014, at 11:50 PM, awallejr wrote:

    I have no problem with CEOs who have skin in the game by owning shares in the company they run. What I do have a problem with is CEOs who get paid obscene sums for simply doing their job. Are the employees getting incentive bonuses for a job well done? No. They are expecterd to earn their income. But not CEOs let's keep rewarding them for a job they were already paid to do.

    As for Chipotle, personally I think they are too expensive to eat lunch at. For 5 bucks go to Wendy's. Get a value drink, 2 sandwiches and a baked potatoe.

  • Report this Comment On May 26, 2014, at 9:49 AM, Estrogen wrote:

    When I heard Buffet abstained on Coke's "excessive" compensation plan, and that his son Howard also sits on Coke's board (and voted yes), I was disappointed. I don't buy the "didn't want a fight" defense either. He only had to vote no. Happens all the time on boards.

    Exec. compensation has gone from between 30-40 times average employee salary 30 years ago to 300-400 times. These are public companies that have other owners to consider. I don't buy the "free market" brain drain argument either. It is a good ole boy network. They are all making enough money that if they wanted to take their talents elsewhere for more money, it would provide very little, if any, utility to their lives.

    These guys at chipotle have made more than enough off of stock increases. They do not need to be extracting that amount of money from their company coffers. Trust me, employees are aware of this stuff too and it affects employee morale in ways that are hard to measure on an income statement balance sheet. I work for a company that has similar practices. Rank and file employees do not trust management because what they do speaks so loudly they can not hear what they say.

    I love the Chipotle product, but others are starting to imitate, and it is not too difficult to duplicate at home. If I owned the stock with the sky high valuation, I'd take my profits and allocate that capital elsewhere. Not to punish, just because capitalism works and all these forces will inevitably work to revert their profits to the mean. When? Who knows. Will it happen? I'd give it a very high probability.

    Thanks for sharing Alyce. That is a big bummer. Everything I had read about these guys was so good up until now.

  • Report this Comment On May 26, 2014, at 11:53 AM, Evathomas145 wrote:

    helloo

  • Report this Comment On May 26, 2014, at 1:04 PM, FreethinkerKW wrote:

    I must ask damilkman about his use of the word "munged" in his first sentence of his opening comments.

    He said, "I think there are a bunch of different topics that get munged together."

    Is the verb mung or munge? And could you explain your definition of your word?

    The two definitions I've looked up for both spellings does not compute with your usage. Is there a new definition we are not aware of?

    Thank you.

    Willing to learn a new word,

    FTKW

  • Report this Comment On May 27, 2014, at 1:04 AM, Maraith wrote:

    There's no excuse for compensation at this level. Especially when their workers are earning what they do. Shameful.

  • Report this Comment On May 27, 2014, at 9:27 AM, BroadwayDan wrote:

    I think the food is real good and they've done a fine job but after seeing just how breathtakingly greedy the CEOs are this stock is dead to me as a customer and an investor. These guys are the antithesis of the conscious capitalism the Fool believes in. Also, if they can be so stunningly greedy, calls the entire operation into question.

  • Report this Comment On May 27, 2014, at 10:08 AM, TMFLomax wrote:

    Hi everyone,

    That's an interesting point, about the "culture of envy" idea, and how it may have gotten worse instead of better with disclosure of pay in SEC filings (giving everybody something to feel envious about).

    I agree with the psychology of that idea (I am certain that envy makes people want what "that guy has"), it'd be nice if people had the awareness to actually temper that emotion when they identify it. And the way the disclosure should have worked, would be if shareholders started getting up and arms about it. Which seems to be what we have now growing -- increasing shareholder displeasure should cause change to happen. For decades shareholders haven't said "boo" to anyone about much of anything. That seems to be changing.

    From my point of view, I can't think that less disclosure for investors could ever be a good thing. I'm with the Judge Brandeis quote, "sunlight is the best disinfectant." Oddly, though, I guess it isn't a disinfectant if shareholders and others weren't paying attention.

    I love that the point has been brought up here, that these people are just doing their jobs. It's true. Maybe in some cases they do deserve a lot of money, but not to the extent that they rack it up over years' time like many of them do. Once they're public, they do work for shareholders.

    I was also disappointed about the Coke compensation issue re: Warren Buffett. It was definitely odd that he said he thinks it's egregious and yet "didn't want to go to war." Disappointing. Buffett has been a major philosophizer regarding out-of-control CEO pay over the years. It would have meant a lot for him to push back on that one.

    As far as Morningstar goes, of course Mansueto owns that much, he is the founder of the company. Many CEOs would take MUCH more cash on top of the stock they own. Apparently he is aware that he has already got a lot of wealth because of starting the company and isn't going to take a huge salary, bonus etc. despite that fact.

    Thanks for all these thoughts, everyone. I -- and I know other investors -- feel very, very mixed about this. I love the company and what they've built into the DNA, but the pay element is disturbing and disappointing.

    Alyce

  • Report this Comment On May 28, 2014, at 12:57 PM, TMFJebbo wrote:

    "... in the grand scheme of things, paying for schooling for executives' children with shareholder money is a real bone of contention for anyone who wants to change corporate-governance policies for the better."

    So these executives that are making hundreds of thousands to millions of dollars a year for some reason lack the wherewithal to pay tuition? That is exceptionally insulting.

    I worked for medium-sized company where the good-ole-boy toadie hangers-on, they called themselves executives, in addition to handsome salaries also got company cars. These fine gentlemen would have been virtually unemployable in any other context, but for some reason the owner bought them cars as part of their compensation. Like the tuition, they would not be able to make a car payment otherwise? The transportation dollars would have been better spent on a church van to pick up employees who's salary would make purchasing a vehicle difficult.

    Give me a break. And shame on you Chipotle.

  • Report this Comment On May 28, 2014, at 3:13 PM, damilkman wrote:

    My definition of mung or mung is intertwined but not necessarily coherent. I used the adjective as I see the issue of ethics and determination of valuation of a CEO different items.

    As a share holder of any company I would hate for a good CEO or any good employee to be lost to competition because he was not paid adequately. However, if a CEO or employee wishes to do the job for much less for whatever reason more power to them.

  • Report this Comment On May 28, 2014, at 5:23 PM, TMFLomax wrote:

    TMFJebbo -- thanks for the comment, I am now ashamed of the sort of "flat affect" I used in my prose regarding paying for children's educational expenses. I fear I'm losing my edge. (Really fearful, in fact.)

    Yeah, for shareholders to pay for children's educations, housing costs, like you said, cars, gas... it's utterly ridiculous. Speaking of children, these kinds of perks make them sound like "dependents." Amazing... and something to think about, really.

    Alyce

  • Report this Comment On May 29, 2014, at 11:46 PM, skypilot2005 wrote:

    Alyce,

    Thanks for the article.

    You wrote:

    “Obviously, 77% of shareholders are furious about Ells' and Moran's pay packages. It doesn't help that more and more often, fast-food companies' rock-bottom worker pay puts a highlight on the other side of the company's employee spectrum.”

    “Say-on-pay votes are non-binding.”

    Yup.

    Another option is to vote them off of the board of directors and against company ballot proposal recommendations.

    Best.

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