Typically, companies get in trouble over excessive executive pay when the executives in question are delivering poor performance. Just so we don't get settled in our opinions, two fast food companies -- Domino's Pizza (NYSE:DPZ) and Chipotle Mexican Grill (NYSE:CMG) -- are turning that assumption on its head.
Yesterday, Domino's Pizza saw almost a quarter of its shareholders vote against its executive pay packages, and nearly a third vote against the chair of its compensation committee, Andrew Balson. Not enough to do any real damage, but it is an extraordinary result in combination with stock price success that has seen shares rise in value from $8 to $80 over five years. J. Patrick Doyle, the current CEO, has held the position since 2010.
These were not retail investors unused to seeing excessive CEO pay packages, but large public funds that analyze CEO pay and governance daily, such as the California Public Employees Retirement System, which called the plan "egregious," the New York City Pension Funds, the Florida State Board of Administration, and the Illinois State Board of Investment. Also campaigning against the excess at Domino's – yes, the "too much dough for the CEO" pun might have cropped up in a few headlines – is CtW Investment Group.
But when I look at the compensation actually realized by Doyle – around $10.7 million for 2013, including profits on options exercised that had a strike price of around $9 – I find myself wondering what the fuss is about. You have to dig a lot deeper than the headline figures to find out what might be irking sophisticated investors such as those that voted against the plan.
So, what's the problem?
First of all, the disclosures surrounding bonus targets. I have to quote this in full as I've never seen anything quite so vague. Performance metrics are:
"certain plans, programs, raw material pricing and discounts, including long-term supply contracts, product pricing and discounts, volume and sales predictions, marketing plans and expenses, domestic and international store count projections, product initiatives, macroeconomic conditions and other meaningful information."
And that's your lot. No actual targets, just a list of measures. Now the stock options gain value from a rise in stock price – something of a blunt instrument given the many other macroeconomic factors involved – but in this case not an ineffective one. Everything else – cash bonus, performance shares – is based on this laundry list of poorly disclosed measures.
And then there's the excessive perks. As if the $90,000 shareholders had to pay for personal use of the corporate jet wasn't enough, the company also paid Doyle's taxes on that personal jetting around, increasing the cost by $77,223. Then the company – or rather, the shareholders – also paid his taxes on umbrella liability insurance payments, on company-paid medical expenses, and on "certain other perquisites." Employers have no business paying taxes for anyone, let alone someone earning more than $10 million a year.
From pizzas to burritos
Now let's turn to Chipotle, whose annual meeting isn't until May 15. CtW is involved here too and recently filed a letter with the SEC strongly critical of pay policy at the company. CtW focused heavily on the excessive equity awards, and claimed that executives are paid more than those at GE (NYSE: GE) and Coca-Cola (NYSE: KO). At the same time, over the same five-year period used for Domino's, the shares have risen from around $80 to over $600, before dropping back to their $500 price tag today.
Chipotle employs two co-CEOs, founder Steve Ells and Monty Moran, thus doubling its costs. That doesn't help.
In 2013, the two earned a combined $93 million, including large stock option profits – hardly a surprise – and around $20 million each in performance shares. You can't argue about excessive rewards here. That's a lot of money, regardless of the stock price rise, and the compensation committee – none of whom are up for election this year – keeps loading large amounts of stock and options to these two founders -- yes, that's right, founders. Founders who don't actually own many shares in the company, however, so they must be selling most of the equity they realize.
As at Domino's, performance conditions are an issue. All equity awards, including some of the options, are based on an adjusted cumulative cash flow, with adjustments rather pointedly excluding stock compensation expense. With this level of stock compensation expense, that's a little like adjusting your profit by excluding a big fat portion of your expenses.
And here too we find excessive perks. Moran's children's schooling is reimbursed at a rate of $25,000. Why?
All executives, including the two CEOs, receive tax reimbursements on perks. Three executives receive housing expenses, and the CFO Jack Hartnung receives commuting expenses (of more than $50,000 in 2013) between his "home" and company headquarters. He's worked for Chipotle since 2002. That's 12 years. It's time for him to move or for the company to make him pay his own commuting expenses. Chipotle has already had between a quarter and a fifth of shareholders vote against its pay plans, and it is flirting with danger again this year.
What these two examples show is that regardless of your returns to shareholders, if your compensation plans are poorly designed and/or excessive and/or contain completely unjustifiable perquisites, your shareholders are going to be unhappy.