Chipotle's investors delivered a rare reprimand to the company's board last week with a vote against the pay packages that the board had granted its two exceptionally well paid chief executives. The combined compensation packages are worth worth about $50 million.
Investors defeated a plan to issue additional shares that would be paid to Steve Ells and Montgomery Moran, Chipotle's co-chief executives. Separately, in an advisory, nonbinding vote, shareholders also opposed the board's arrangement for compensating the two men. Such advisory votes are required under the 2010 Dodd-Frank Act, which gives shareholders a formal opportunity to raise their concerns about executive compensation under a provision known as "say-on-pay."
The Chipotle situation is unusual: Shareholders almost never find anything to complain about in executive pay packages, and they typically support the board in say-on-pay votes by comically wide margins.
Some argue that say-on-pay has failed. Critics say it hasn't done anything to bridge the yawning chasm between executive pay and ordinary wages and salaries that has become so commonplace in American companies. By one recent estimate, executive pay is typically 204 times that of the median worker and increasing. Forty years ago, the multiple was 20 or so.
The average result in say-on-pay votes this year has been 91 percent in favor of the board's proposal for compensating executives, according to data from the consulting firm Towers Watson. Chipotle's vote, in which more than three-quarters of shareholders voted nay, was the worst say-on-pay performance this season. In those occasional cases in which a board has received less than overwhelming support from shareholders, the problem is usually that the executive's pay isn't sufficiently tied to company performance, explained Towers Watson director Jim Kroll.
"Everyone loves pay-for-performance alignment. It’s like motherhood and apple pie," Kroll said. Sometimes, though, boards and shareholders can disagree about the best way to connect compensation and the corporation's success.
Ells earns 778 times the median wage at the company he founded, which is a wide discrepancy even by today's standards. He's better paid than the chiefs of companies like Ford and AT&T, as the New York Times reported. Discrepancies are still greater in the fast-food industry generally, where CEOs make an average of 1,203 times median compensation, according to Bloomberg.
But the fact that investors on Wall Street don't have a philosophical problem with sky-high compensation plans for execs really shouldn't surprise anyone. If you ask experts on executive compensation, they'll tell you say-on-pay was never meant to restore equality between workers and heads of companies.
Boards try to avoid conflict with shareholders, so even though the say-on-pay vote does not bind the board to take action, the provision has changed the way corporations are governed. "We've seen companies shift some of their behavior," said Aaron Boyd of Equilar, a firm that collects data on executive compensation.
Chipotle's board faces not only the displeasure of shareholders in the advisory say-on-pay vote, but also their rejection of the company's plan to issue its executives additional stock, which is binding. "I expect Chipotle to talk to shareholders, receive their feedback, and probably make adjustments to their pay plan as well," Boyd said.
The company's executives are very well paid, but investors seemed as concerned about the make-up of Ells and Moran's compensation agreement as they are about the top-line number. Ells and Moran receive new shares of Chipotle stock annually, which they are not required to retain. They've sold most of the shares they've received for cash, and investors worry that they don't really have all that much skin in the game.
"These executives own so little equity," said Michael Pryce-Jones of CtW Investment Group, which advises pension funds sponsored by unions and has fought aggressively on behalf of shareholders in say-on-pay votes, including Chipotle's. He explained that as long as Ells and Moran can create movement in the price of the stock, they can find profit on every new batch of shares they receive.
Chipotle issued a statement saying that the board took the failure of the proposal seriously. "It has always been, and continues to be, a top priority that our compensation programs are driving the creation of shareholder value," the statement read.
Far from reducing income inequality, the say-on-pay provision of Dodd-Frank has empowered the very shareholders whose insistence on paying for performance is ultimately responsible for the increase in executive compensation, Justin Fox writes. Yet these same shareholders are generally institutional investors with the stated goal of protecting the livelihoods of ordinary people.
Asked about this criticism of say-on-pay, Pryce-Jones and others noted that the Dodd-Frank law also requires companies to disclose a CEO-pay ratio, which would reveal more information about the gap between executive and median compensation in a company. That information might be useful to activists and policymakers, but whether investors would have any interest in it is an open question. In any case, that aspect of the law won't go into effect until 2016 at the earliest.