WSJ: Refreshing Candor in Chipotle’s Reduced CEO Comp

Chipotle Mexican Grill Inc.’s disclosures about its executive compensation for 2015 and beyond are, some say, a refreshing approach to corporate accountability and transparency.  The burrito chain’s co-chief executives’ 2015 compensation was cut in half, reflecting the company’s share prices falling 47% in the three months to mid-January 2016 after outbreaks of illnesses across various states involving E. coli bacteria and the norovirus were linked to its restaurants.

What drew governance experts’ attention was the fact that the board’s compensation committee revised its annual incentive plan for 2016–in particular its equity awards–to address the crisis and avoid a “misalignment of shareholder returns and executive officer compensation.” In a proxy filing with the Securities and Exchange Commission on Friday, Chipotle said that its 2016 performance shares “will be tied solely to highly-challenging absolute stock price performance goals.” Award shares will vest if the average closing price for any 30-day period is at least $700, around 52% higher than the grant date. [emphasis added] The committee considered alternative ways to measure performance this year, but “ultimately concluded that restoring lost shareholders’ value was paramount,” according to the proxy.

“This is a carefully calibrated compensation decision, and very nicely disclosed,” said Jim Barrall, a partner and global co-chair of the benefits and compensation practice of Latham & Watkins LLC, in Los Angeles.  “It isn’t common for a company to discuss, in its 2015 proxy, what it has determined for its 2016 compensation and it isn’t required by law,” he said. “They obviously have the challenges and have met them head on with this disclosure.”

By tying stock compensation to a specific share price drop event, the board is cognizant of the public perception and is creating an incentive for executives to fix the health and safety issues at Chipotle, said Wayne Guay, professor of accounting at the Wharton School. “I cannot recall seeing another example of a firm taking into consideration a recent stock price decline…and saying it dropped because of what you did and we will have to recover those losses before you reap any further gains,” he said.

This is encouraging, but we agree with Steve Odland, president and CEO of the Committee for Economic Development and former CEO of Office Depot, who told CNBC that the compensation should be tied not just to stock price but to the underlying cause of the drop in shareholder value — the company’s troubling series of food safety issues.

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