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Chipotle Shareholder Overreach


It doesn’t always feel like it, but shareholder votes on executive compensation are actually non-binding. Today, it seems that shareholders’ voices are growing more and more influential and their “non-binding” votes are wielding more and more power. And unfortunately, the responses the shareholders receive to their influence are setting precedents and solidifying their power to steer the direction of compensation decisions made in the boardroom. This is a problem in and of itself, but the fact that boards can be influenced in this manner often sets the stage for further investor intrusion into what should ultimately be board decisions. Shareholders get their say when they vote for directors each year – the process should end there.

Let’s take a look at a recent high profile example: Chipotle.

The company has received extensive coverage lately thanks to a large shareholder group making significant waves about Chipotle’s compensation programs. On the other hand, the burrito company also received applause from the market for the outreach, changes and subsequent increase in shareholder approval. While it is certainly great to see Chipotle regain the support of their shareholders, what did it cost? And throughout all of the media attention, the question no one seems to be asking is if the compensation plans needed a full overhaul to begin with. Is this just shareholders flexing their muscles?

As the 2014 proxy outlines, Chipotle had the following programs in place:
1)    Annual incentive program based on various performance metrics – no discretion;
2)    Stock-settled SAR’s which only have value if value is created for shareholders; and,
3)    Performance shares based on cash flow from operations.

Additionally, executives were granted special equity awards assigned specifically for Chipotle’s outstanding performance.

There were a number of issues raised by shareholders, and we don’t dispute the merits of those arguments or the need to tweak certain aspects of the programs. That said, the programs listed above seem like a resemble a list of good compensation program design to us. We wonder why Chipotle shareholders requested major compensation changes when the company has delivered outstanding returns to investors (~1,500% since IPO, in Chipotle’s case) and top quartile operational performance relative to industry peers.

We’ve drawn the conclusion that shareholder say on pay vote is not, in fact, related to the programs themselves. Rather, As such, the conclusion we have drawn from the shareholder say on pay vote is that it is not in fact related to the programs themselves, rather, we believe they were voting against the sum total of the payouts to executives. In short, they were effectively saying there should be a cap on pay, no matter how big the shareholder returns are. While the dollars at face value are big dollars, the context of these total rewards seems to be lost. In short, this management team approximately doubled the market value from 2011 to 2014, delivering to shareholders an additional $11 billion in increased value. The total compensation provided to the four executives in this same time was $233 million, of which $167 million were stock appreciation rights that only paid out upon a stock price increase.

The following is a graphical representation displaying a 102% total shareholder return with compensation rising 55% over the same period.


Given the fact that shareholder support immediately increased following the disclosure that significant reductions to executive compensation levels were approved for 2015, it is fair to assume that this might have been the first successful shareholder vote to stealthily attempt to place an undefined cap on executive compensation.  It appears to have worked, since 2015 total compensation will be drastically lower relative to 2014.

It’s unfortunate that Chipotle experienced this and felt the need to comply with shareholder influence that should have never crept into the boardroom in the first place. What’s even more troubling is the fact that their voices weren’t just heard, but were quickly given audience. This is one example of shareholder overreach where government policies provide a stage to inappropriately insert themselves into the inner-workings of a company – a place they don’t belong. It is our sincere hope that the say-on-pay foothold doesn’t turn into widespread shareholder manipulation of the entire company management and governance process.

The following excerpts provide the 2015 Chipotle Proxy, including a letter to shareholders. We’ll let you be the judge.

The proxy summary begins with this statement:

Notwithstanding our record of consistently strong business performance, approval of the say-on-pay vote held at our annual meeting in May 2014 declined steeply from prior years. In response, our Compensation Committee and management team had an extensive dialogue with our shareholders, including contacting shareholders representing nearly two-thirds of our outstanding common stock. Changes we made in our executive compensation following the 2014 say-on-pay vote and our extensive shareholder engagement are summarized below. These changes were implemented for officer equity awards made in early 2015, and as a result, will be fully reflected in the compensation disclosures in next year’s proxy statement.

The CD&A starts with a letter to shareholders from the compensation committee:

Dear Fellow Shareholder,

2014 has been a year of intense engagement and listening for our Compensation Committee and our Board of Directors.

The Compensation Committee has always believed the best way to drive outstanding shareholder value creation at Chipotle is to design compensation programs that incentivize the unique entrepreneurial and innovative drive of our management team, and that reward success when the management team’s efforts build shareholder value. The results of that strategy to date have been astounding – while changing the way people think about and eat fast food and creating one of the most valuable and growing brands in the restaurant industry, our management team has also delivered total shareholder returns of 1,456% since our IPO in 2006 and 676% for the five years ended December 31, 2014.

After our executive team delivered another year of outstanding performance in 2013, with sales and net income growth and shareholder returns all continuing to perform strongly in comparison to other restaurant companies, we granted stock appreciation rights, or SOSARS, to each executive in February 2014. These equity grants were larger than grants made in the past several years, as we felt that consistently strong performance and increases in shareholder value justified increased recognition.

The Compensation Committee was naturally very concerned by the say-on-pay vote at our annual meeting in May 2014. Accordingly, we reached out to several of our shareholders to better understand their concerns with our compensation practices, and we committed to take the feedback that we received very seriously and re-evaluate our compensation practices in light of that feedback.

In early 2015, we expanded our shareholder outreach efforts and engaged with shareholders representing about one-half of our outstanding stock. We reviewed potential revisions to our executive compensation approach with these holders, and received positive support and feedback. Based on these discussions and conversations with our management team, we made our officer equity grants for 2015, as more fully discussed below. Although the changes we made with these awards could not address every viewpoint expressed during our engagement with shareholders, we believe the changes have resulted in awards that will continue to help drive the creation of shareholder value, while addressing the principal points of concern for shareholders with our past compensation practices.

The members of the Compensation Committee would like to thank the shareholders with whom we spoke for their insights and candor. We value the support and input of our shareholders, and we look forward to the opportunity to work with our management team to continue to build shareholder value for years to come.