How Much Is Too Much? Chipotle Mexican Grill Shareholders Reject Executive Compensationhttp://www.fool.com/investing/general/2014/05/24/how-much-is-too-much-chipotle-mexican-grill-shareh.aspx Brian Shaw
May 24, 2014
Chipotle Mexican Grill (NYSE: CMG) has been a tremendous growth story over the past decade. With co-CEO's Steve Ells (also the company's founder) and Monty Moran at the helm, Chipotle has generated explosive growth and rewarded shareholders with market-crushing returns since the company's IPO in 2006. While few question the leadership ability of Ells and Moran, a debate is under way with respect to how much this leadership is worth. Recently, just 23% of Chipotle shareholders voted in favor of the company's executive compensation plan.
Few will argue with the fact that this is a lot of money. However, making the determination whether this compensation is excessive or not requires some additional considerations.
Context for the compensation plan
The majority of the executive compensation issued in 2013 relates to stock appreciation rights ($12.3 million of the $20.3 million in "stock" compensation noted in the table above.) $12.3 million is the fair value of the awards based on a series of valuation assumptions, but the executives will receive zero value from these awards unless they remain with the company for several years and the share price rises from the price on the date the awards were granted. As a result, the amount of real money that Chipotle's executives will receive is directly correlated with management's ability to continue to drive superior share price returns over the next seven years.
Alignment with shareholder interests and performance
In 2013, management continued a trend of remarkable performance against a peer group of all publicly traded companies in the restaurant industry with annual revenues greater than $500 million. Here's a snapshot of this performance:
While not all companies in this peer group are high-growth concepts, there are a number of well-regarded growth companies such as Panera Bread (NASDAQ: PNRA) and Starbucks (NASDAQ: SBUX), both of which Chipotle has outperformed. This performance highlights the strengths of Chipotle and management's track record of success.
How much is too much?
To help form an educated opinion, here is a frame of reference comparing Chipotle's co-CEOs with a selection of peers in the restaurant industry:
All five companies in the table above have generated solid market-beating returns over the past five years. While Chipotle has led the way with a return in excess of 500%, the compensation disparity between Chipotle's leaders and the heads of larger companies such as Starbucks and Yum! Brands is difficult to reconcile. This is likely the single biggest reason behind shareholders' rejection of Chipotle's executive compensation plan.
The bottom line for investors