Chipotle Mexican Grill, Inc.’s (CMG) compensation committee made a wise decision last week, opting to tie executive compensation to CMG stock performance going forward.
Doing so should further align the interests of Chipotle investors with top management, and there’s no denying that this is a shareholder-friendly move, and one that the individual investor should cheer from the sidelines.
Cheer, Chipotle investor, Cheer! And then yell. Viciously. Because it is not enough. At this point, CEO Steve Ells needs to go, and nothing less will be tolerable.
Tying Pay to CMG Stock: The Deets
Don’t look at this as gift — it’s the least Chipotle could’ve done. Shareholders deserve this, and not changing the compensation math would’ve been outrageous.
In fact, tying executive compensation to the performance of CMG stock in 2016 would have been borderline dishonest. That’s because shares were so beaten up going into 2016 they were almost bound to go higher, regardless of how the recovery from the health crises played out.
Even now, after last week’s surprising news that another case of norovirus was discovered at a Boston-area Chipotle, CMG stock is up 7% year-to-date.
Chipotle’s compensation committee chair Neil Flanzraich acknowledged this in an SEC filing Friday:
“We had concerns that using 2015 year-end financials or stock price at the beginning of 2016 as the basis for relative performance evaluation for a 2016 performance share program could create a misalignment of shareholder returns and executive officer compensation.”
Admittedly, it’s still possible for Chipotle stock to have a rough year in 2016, and as I said last week, I certainly don’t think CMG stock is a buy after the most recent norovirus scare in Boston.
But the burrito chain would have to screw up on many different levels to have another absolutely miserable year performance-wise. Why?
Well, a big reason is the fact that Chipotle had already planned on aggressively buying back shares. In its fourth-quarter earnings announcement in early February, Ells told investors Q4 was “the most challenging period in Chipotle’s history.”
The same press release also announced the authorization of another $300 million in share buybacks in addition to the $178 million left on its share-buyback plan already.
Buybacks provide a level of support for the stock price as the company provides artificial demand for its own stock; once purchased, the company has reduced the overall share count, which skews earnings per share figures higher.
An oft-criticized corporate shenanigan, stock buyback programs can be used to the long-term detriment of shareholders if executive incentives are tied to increasing EPS.
Chipotle’s new compensation plan is not connected to CMG stock’s EPS at all. Instead, it kicks in when Chipotle stock closes above $700/share for 30 consecutive days. Although CMG has a 52-week high of $758, reaching $700 again — especially for an entire month — won’t be easy. Shares currently cost around $518. $700 is 35% away.
Still, even if Chipotle stock does regain the $700 level this year (which I’d be shocked to see), wouldn’t it be obscene if anyone at the executive level got rewarded, considering all that’s happened in recent months?
No, as I said back in January, Ells is on thin ice, and I wouldn’t be surprised to see him kicked to the curb by 2017. Now, after the most recent norovirus snafu, he definitely deserves the boot. Heck, you can even let the guy keep his position as chairman, but let someone else handle the CEO slot.
The most recent norovirus case in Boston is downright embarrassing. And it raises serious questions about whether systemic issues still exist with Chipotle’s quality control.
Will there be more victims? More investigations? More lawsuits? More expensive marketing campaigns? Less customers?
These are all very real questions, and ones that demand a new leader with a fresh perspective to address.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
