Chipotle

Annual meeting: May 11, 2016

Black or pinto, equity or cash, the executive compensation package at Chipotle has been a bloated burrito for too many years. While the food safety crises faced by Chipotle in 2015 may not be directly linked to the company’s continuing extraordinary executive compensation, they give shareholders another reason to vote against compensation this year. While the board has made some changes – most of which fall into the “too little, too late” category –the fundamental issues of Chipotle’s compensation remain the same: the company has two CEOs and pays them each too much.

Chipotle received a bit of positive press when its preliminary proxy came out for the fact that because results “fell significantly short” of performance targets, no 2015 bonuses were awarded to executive officers. But the fact that anyone thought the executives might be entitled to an annual bonus at all in a year when the stock price declined by nearly one third indicates the audacious standards that have been reached. Last year both CEOs received bonuses of over $3 million in cash, and while not receiving that money may have stung slightly, it is important to note that Steve Ells made over $210 million from the cashing in Chipotle stock in the past five years, in addition to his cash compensation. One presumes he has put a bit away to tide him over during this bonus-free year.

Also of note, co-CEO Monte Moran received over $100 million in value in options exercised in 2015 alone. (An enterprising journalist ought to research when those options were exercised in regard to the timing of the bad publicity Chipotle received this year.)

If the CEOs had held on to the stock options received in past years, or exercised them and purchased additional stock, they would have been personally hit by the falling stock price to a much higher extent. Instead, both have routinely exercised shares when they could do so. Steve Ells owns fewer shares than he did in 2011. In this context, the loss of cash bonuses is considerably less impressive.

Each CEO received salaries of well beyond 162m deductions: $1.5 million for Ellls, $1.3 million for Moran. In addition, their compensation includes stock awards of over $12 million. While the proxy statement notes that these awards were granted prior to the crisis, Eleanor Bloxham, CEO of the Value Alliance wisely points out that the board should have considered clawing them back.

That company which had changed its long-term compensation plan in 2015, changed it again in 2016: with “vesting of the 2016 awards to be based on restoration of shareholder value to approximate levels achieved prior to the food-borne illness issues that impacted us in the latter half of 2015.” Specifically the new stock awards will pay out only if Chipotle shares trade at a level of $700 per share for a 30 consecutive trading-day period.

Many experts raise serious concerns as to tying compensation so tightly to stock price, which can create a myopic focus. http://www.cnbc.com/2016/03/15/why-chipotle-shouldnt-tie-ceo-pay-to-stock-price.html

SHAREHOLDER PROPOSAL

Shareholders will also vote for a shareholder proposal that may help determine if sustainability is a main ingredient or a garnish. The proposal calls on the compensation committee to assess, “the feasibility of integrating sustainability metrics into the performance measures of senior executives under the Company’s compensation incentive plans. Sustainability is defined as how environmental and social considerations, and related financial impacts, are integrated into corporate strategy over the long term.

Clean Yield Asset Management, the proponent of the proposal, has filed at the SEC an open letter to shareholders well worth reading in its entirety. The letter notes that many companies in the industry have explicit sustainability reports (Dunkin Donuts, Panera, McDonalds, Starbucks and Yum). It also provides links to a wealth of academic studies that support the value of sustainability linked to compensation. http://www.sec.gov/Archives/edgar/data/1058090/000121465916010365/g317160px14a6g.htm

After outlining the reasons for the proposal Clean Yield also raises important points on the newly announced plan: “Tying compensation to the recovery of the pre-crisis price of CMG stock is not a substitute for the deficits identified above. Share prices can be artificially manipulated through stock buybacks, mergers and acquisitions, earnings restatements and other means. Depending upon the strategies Chipotle uses to elevate its stock price, the latter could recover while leaving the company just as vulnerable as before to sustainability-related failures.”