McDonalds

Annual meeting:  May 24

Why did CEO pay at McDonald’s practically double last year?  The chain faces a fundamental demographic challenge of customer decline. (I see this echoed in my own household: as soon as my kids were past the age of Happy Meals they began to treat the fast food chain with disdain). The short term solutions – selling more restaurants to franchisees, offering breakfast all day long – do nothing to change the fundamental issues faced by the company.

And yet, McDonald’s CEO Steve Easterbrook’s total disclosed compensation grew from $7.4 million in 2015 to $15.4 million in 2016 total compensation. He received a $3 million increase in just his one-year incentive pay,  that totaled $4.5 million for 2016. The remainer of the overall 94 percent increase came from increases in stock awards, options and salary.

In the menu of questionable pay practices McDonalds has some standards: a high calorie salary, super-sized buybacks, and an extra-large order of non-GAAP calculations.

Each of the named executive officers at McDonald’s received a salary increase in 2016. These salaries also help inflate bonuses, since target is based on a percentage of salary. Easterbrook’s salary was increased to $1.3 million, putting considerably higher than the median salary for S&P 500 CEOs.

We’ve discussed buybacks before. The statistics from McDonalds are particularly incredible when compared to company earnings. According to Forbes, McDonalds spent $6 billion more on buybacks ($20.5 billion) from 2014 to 2016 than it earned in income ($14 billion).  These buyback have been funded by debt. The Forbes article provides an excellent introduction to buybacks generally.

As noted above, the major component of the pay increase was the annual incentive. McDonalds is yet another company where bonus is paid based on figures that have do not comply with generally accepted accounting principles (GAAP). The adjusted 11% operating income growth rate is nearly twice the amount reported under standard accounting.

Easterbrook became CEO in 2015 and some of his decisions – notably all-day breakfast – have driven increased traffic. Even those who laud some of his choices are not quite sure he deserves the break he got. As Joe Cahill wrote in Crain’s, “the company shouldn’t shower him with riches for short-term results that don’t necessarily signal sustained recovery.”

For now the CEO is loving his pay package, and shareholders are loving the buyback inflated boost in stock price. But ultimately if customers aren’t loving it the company cannot succeed.

Also of note, in addition to voting on pay, shareholders have the opportunity to vote on an As You Sow proposal encouraging the company to report on the environmental impact of the polystyrene foam cups it continues to use internationally.