Chipotle Mexican Grill (NYSE:CMG) found itself on the receiving end of some unwelcome publicity this week when employment-research company Glassdoor released its yearly ranking of the nation's highest CEO-to-worker pay gaps.
The burrito roller came in at #2, behind only Discovery Communications, with a ratio of 1,522 to 1. According to Glassdoor, founder and co-CEO Steve Ells made $28.9 million last year, while the average employee pulled in just $19,000. Labor advocates and political activists have cited such statistics as evidence that workers are underpaid and that CEO compensation and income inequality have become excessive.
While there may be some cases where CEO pay is over the top, I don't believe this one of them. Here are several reasons why:
1. Chipotle pays better than the average restaurant
According to Chipotle spokesman Chris Arnold, the company pays its average worker above $10/hour, which would equate to an annual salary of $21,000 or $22,000 given a 40-hour workweek. The company also offers benefits like paid sick and vacation days, as well as tuition reimbursement, to hourly employees. McDonald's, meanwhile, made national news earlier this year when it said it would lift wages at company-owned stores to $1/hour above the local minimum wage. While that won a golf clap from labor advocates, it also frustrated McDonald's franchisees who own 90% of the company's restaurants and tend to pay at minimum wage, like most legacy fast food chains.
2. Chipotle offers more opportunity than most low-wage jobs
More than an hourly wage, Chipotle offers its front-line workers a chance to move up the career ladder. With the possible exception of Starbucks, no restaurant company is opening more stores in the U.S., and that corporate growth equates to new jobs and promotions for front-line workers as the company promotes from within. An impressive 98% of its managers started out as crew employees, and some eventually move up to the level of restaurateur, which commands an average salary in the six digits.
Chipotle touts its people culture as one of the characteristics that separates it from the competition, and the company's ever-improving "throughput" seems to be a testament to that model. It is also the only major restaurant chain that does not franchise, meaning it can foster a company culture and move employees up to the next level in a way that a rival like McDonald's cannot.
3. Ells founded the company and has run it since
While that $28.9 million might seem like an exorbitant amount of money for some CEOs, Ells founded this company, and it's been his visionary leadership and hard work over the last 20-odd years that have made it so successful. I can't put a price tag on his ongoing impact on the company, but Ells and Chipotle essentially pioneered the fast casual trend that has spawned dozens of other restaurant chains and plenty of not-so-successful IPOs, a sign that the value of his idea extends beyond Chipotle.
And it's not as if the company is selling assault rifles or cigarettes. I know Chipotle has gotten flak for the calorie counts in some of its meals, but customers have the ability to customize their meal -- eliminating the tortilla and sour cream, for example, for a lower calorie dish -- and the sustainably raised fare is healthier than traditional fast food. It's also worth noting that Chipotle's chiefs are paid predominantly through stock options and grants that aren't directly taking money away from everyday workers. Part of the reason then that their pay is so high is because the stock has been so successful, having returned more than 15 times its original value at its IPO in 2006. Ells and his co-CEO, Monty Moran, deserve more credit for that, and therefore more compensation, than anyone else.
4. Businesses have to pay the market labor rate
It's worth noting that of the top five companies on Glassdoor's list, four of them were retailers, including Chipotle. This isn't a surprise -- retail wages tend to be low, because retailers need a lot of unskilled labor. Calls for a $15/hour nationwide rate are unrealistic, even for a company as successful as Chipotle. If the burrito chain were to pay a minimum of $15/hour, its $441 million profit last year would translate into a sizable loss.
CEOs should be paid based on their ability to create and grow successful businesses, generating value for shareholders, customers, and employees alike. At Chipotle, Ells and Moran have proven their ability to do this, while creating opportunities for employees along the way. As a longtime shareholder, I wish them continued success.
Jeremy Bowman owns shares of Chipotle Mexican Grill. The Motley Fool owns and recommends Chipotle Mexican Grill and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.