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 (CMG 0.40%) 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 (ORCL 0.22%) 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.
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.
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 (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.
