Chipotle's CEOs Deserve Their Millions

For most companies, "say-on-pay" resolutions have been a bit of a farce. No matter how well or poorly the company does, shareholders seem to approve big pay packages for top executives. (The say-on-pay resolutions are not even binding.)

That wasn't the case for burrito joint Chipotle Mexican Grill (NYSE: CMG  ) this month. Shareholders overwhelmingly rejected its say-on-pay resolution, with only 23% of shares voting in favor. Chipotle investors apparently think that co-CEOs Steve Ells and Monty Moran didn't deserve pay packages valued at about $25 million each.

Chipotle's CEOs are under fire for their compensation

However, Chipotle has posted phenomenal results in the last 5 years under the leadership of Ells and Moran. While I believe that investors should be more stingy about CEO pay in general, Chipotle's leaders earned their incentive-laden pay. Other companies like Oracle (NYSE: ORCL  ) are much bigger offenders in terms of offering ridiculous executive pay.

Pay-for-performance
At $25 million each, Chipotle's CEOs may seem expensive, but it's important to recognize that the vast majority of Chipotle's executive compensation is performance based. The majority of compensation is tied to the company's stock price performance. Other factors like earnings growth, comparable store sales growth, new restaurant performance, and operating cash flow also impact incentive pay at Chipotle.

Critics of Chipotle's executive pay structure have argued that the incentive pay is not effective enough at aligning the interests of management and shareholders. They may have a point, in some respects -- Chipotle's CEOs could earn fairly generous pay packages even if the company didn't perform very well.

That's not what's happening, though. Under Ells and Moran, Chipotle has generated incredible revenue and earnings growth in the last 5 years, leading to humongous stock price gains. The board's decision to reward them with about 1% (combined) of the massive increase in shareholder value seems very reasonable.

CMG Chart

Chipotle Mexican Grill Revenue, EPS, and Stock Price Growth, data by YCharts

The Change to Win investment group (which advises union-sponsored pension funds) also criticized the growing disparity between CEO pay and median worker pay at Chipotle. It's true that Chipotle's CEOs make almost 800 times more than the median Chipotle employee's pay -- but again, most of that pay consists of performance-based bonuses.

Most importantly, Chipotle offers better pay and much better advancement opportunities than the vast majority of its peers in the fast-food industry. While there are certainly plenty of complaints about pay or hours, most employees like working at Chipotle. An impressive 84% of employees who posted reviews on Glassdoor approve of the co-CEOs.

A prime offender
By contrast, Oracle fits the bill as a company that has heartily deserved shareholder rebukes. Oracle CEO Larry Ellison -- who is already the fifth richest person in the world -- regularly takes home pay packages in the $50 million-$100 million range.

It's true that Oracle is a much bigger company than Chipotle. However, Oracle's revenue growth has been sluggish since it completed its purchase of Sun Microsystems a few years ago, and in the last 5 years, Oracle's stock performance has essentially equaled that of the market.

ORCL Chart

Oracle Revenue, EPS, and Stock Price Growth, data by YCharts

Paying one of the richest people in the world more than $50 million annually to oversee market-level performance seems crazy. Thus, it's not surprising that 85% of the Oracle shares not owned by senior executives voted against last year's say-on-pay resolution.

Rewarding excellence
The reason why I can't get on board with the investor outrage against Chipotle's CEOs is that they have delivered phenomenal performance in the last 5 years, no matter what metrics you look at. Even when compared to another top-notch fast casual chain, Panera Bread (NASDAQ: PNRA  ) , Chipotle outperformed by leaps and bounds in 2013 and in the last 5 years overall.

If Chipotle stumbles and executive pay remains at today's levels, I'll be the first to complain. However, most investors agree that "pay-for-performance" compensation structures are a good thing for aligning management's interests with those of shareholders.

Chipotle's CEOs have presided over phenomenal growth, and the company has been gaining momentum recently. In this context, not rewarding top executives with a generous amount of stock compensation just seems selfish.

There are plenty of high paid CEOs that have delivered mediocre performance in recent years, like Oracle's Larry Ellison. Shareholder advocates should plant their flag at one of those companies. If anybody deserves a $25 million compensation package, it's Chipotle co-CEOs Steve Ells and Monty Moran.

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Read/Post Comments (12) | Recommend This Article (3)

Comments from our Foolish Readers

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  • Report this Comment On May 25, 2014, at 11:51 AM, Domeyrock wrote:

    If you saw Inside Chipotle on Netflix, you'd see Chipotles huge success was an accident. Starting Chipotle was meant to be a stepping stone for the founders to make enough money to open a high end restaurant. They purposely built everything has cheaply and simplistically as possible with basic good ingredients to control costs. Low and behold this is what the modern day consumer wanted, and then some. So I wouldn't confuse the success of Chipotle because of its founders as much as its success is because of the consumers that are willing to pay for it. To start paying the ceos more than they need is to start down the road where McDonalds went, ultimately cutting suppliers short, cutting employees short, not expanding where they could into other businesses where they could. If the ceos are shareholders, that should be enough reward for their work.

  • Report this Comment On May 25, 2014, at 6:42 PM, ridgeback1964 wrote:

    So why is it that CEO's get all the credit when a company performs? They are not the only ones making things happen.

  • Report this Comment On May 26, 2014, at 7:40 PM, TMFGemHunter wrote:

    @ridgeback: I don't think the CEOs should get all the credit. However, Chipotle hires probably 10,000 or more employees a year at this point. The fact of the matter is that the people on the burrito line are all replaceable -- Chipotle is constantly training new employees and the experience is pretty consistently good across the chain. That's not just because of the CEOs, but it does say something about the culture that management is fostering.

    If Chipotle was treating its workers really poorly I would feel differently about the CEOs getting massive incentive pay. However, I think Chipotle is one of the best companies in the fast food industry in terms of creating a real career path for employees from day one.

    Adam

  • Report this Comment On May 26, 2014, at 8:35 PM, SuntanIronMan wrote:

    Larry Ellison's egregious pay package is shouldn't justify someone else's less egregious pay package. I mean... it does justify it, because that's how things work on Wall Street... but it shouldn't.

  • Report this Comment On May 27, 2014, at 9:08 AM, TMFGemHunter wrote:

    @SuntanIronMan: It's not that Ellison's pay package justifies the Chipotle CEO pay packages. But it does raise the question of why investors and shareholder advocates are so focused on Chipotle when it's one of the best performing companies in the world. It's not like Chipotle is the only company with a high-paid CEO. At least in Chipotle's case, you're getting fantastic earnings, revenue, and stock performance for that price.

    Adam

  • Report this Comment On May 27, 2014, at 10:43 AM, SuntanIronMan wrote:

    As good as the stock performance has been, does anybody think the two co-CEOs are just going to call it quits if they don't get their pay package? Cause if you think they will stay no matter what -- pay package or no pay package -- then you don't need to use shareholder money to further incentivize them to stay.

  • Report this Comment On May 28, 2014, at 5:06 AM, strelna wrote:

    What pay package would you not pay, being too high? At what point would you baulk at the size of the compensation?

  • Report this Comment On May 28, 2014, at 7:20 AM, ENDzFED wrote:

    LOL - kind of like saying Bernanke was not corrupt when asked who he gave $23 Trillion dollars to said "I dont know"

  • Report this Comment On May 28, 2014, at 9:36 AM, axz055 wrote:

    Oracle is a massively larger company. Ellison's $80M 2013 compensation was 0.7% of Oracle's 2013 net income.

    The $50M paid to the Chipotle CEOs is 15% of Chipotle's net income last year.

    At what point does the sheer magnitude of the pay start to become a significant drag on profits?

  • Report this Comment On May 28, 2014, at 10:09 AM, gskinner75006 wrote:

    Chipotle is a beanie baby stock that is trader driven.

  • Report this Comment On May 28, 2014, at 2:19 PM, TMFGemHunter wrote:

    It's hard to say what exactly is the upper limit of reasonable compensation. However, you have to look at the growth in earnings and market value. Just in the last two full years, pre-tax profit is up more than 50%: nearly $200 million. So far, all signs point to similar percentage growth in the next two years (which means faster growth in terms of raw numbers).

    When you look at market cap, the numbers are even more stunning: Chipotle has added almost $15 billion to its market cap in the last 5 years.

    In that context, I don't see how one can conclude that the CEOs are somehow stealing the company. Each CEO's pay package is equivalent to about one quarter of pre-tax earnings growth. As a shareholder, I'm happy to pay at that level as long as Chipotle stays on its current earnings growth trajectory.

    Adam

  • Report this Comment On May 28, 2014, at 7:39 PM, SuntanIronMan wrote:

    @TMFGemHunter

    But do you have to pay that amount? Will founder and co-CEO Ells leave the company if he doesn't get his pay package? If the answer is "No, he is 100% committed to the company and I can't really envision him voluntarily walking away from his baby anytime in the near future.", then you don't need to pay him an ever increasing pay package to incentivize him to stay. If he'll stay no matter what, then he'll stay no matter what.

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