Industry Update
Opinion Article13 March 2018

Pay-for-Performance Model measures components of CEO compensation

By Keith Kefgen, Managing Director & CEO at AETHOS Consulting Group and Terry Donovan , Senior Associate at AETHOS

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Terry  Donovan Terry Donovan

To be a CEO in the restaurant industry is tough work, and short lived for many, pay-for-performance model measures components of CEO compensation.

AETHOS Consulting Group has conducted a recent analysis, testing whether deficient performance would precipitate a CEO's ouster. Keith Kefgen, Managing Director and CEO of AETHOS and Terry Donovan, Manager, took a look into the three components of CEO compensation: salary, incentives, and pay-for-performance.Of the study, nearly 20% of the CEOs in the annual study of pay-for-performance resigned, retired or were pushed out.

In conducting the analysis, AETHOS used a proprietary Pay-for Performance Model to measure stock appreciation, EBITDA growth, market capitalization and total direct compensation. Of the departing CEOs, a clear majority had double-digit declines in their stock price from January 1, 2014 to January 1, 2016.

The two who saw stocks rise were Sally Smith at Buffalo Wild Wings and John Schnatter of Papa John's. More recent events saw Smith lose a battle with activist investor, Marcato Capital Management, and Schnatter bumping heads with the NFL regarding player protests. It appears that there are more ways to lose your job, but inferior performance is still the greatest career killer.

In terms of CEO pay, the best plans have more "at risk" compensation in the form of short and long-term rather the guaranteed pay such as salary. The average salary of a restaurant CEO in our survey was just over $700K, with Chipotle CEO Steve Ells earning $1.54M and Famous Dave's of America CEO Michael W. Lister at $62,308.

The average bonus for a restaurant CEO was $769K, down from $1.2M in the previous year's study. The average Long-Term Incentive Plan (LTIP) was also down for the group declining from $2.7M to $2M last year. The largest bonus payment went to Patrick Doyle at Domino's - just over $4.6M. A total of 13 CEOs earned more than $1M in bonus pay. The largest LTIP went to Starbucks' Howard Schultz with nearly $17M in stock. Almost half the group (25 CEOs) had a stock grant worth more than $1M.

"We were struck by two of the best paid CEOs deciding to step down, namely Steve Ells of Chipotle and Howard Schultz of Starbucks," says AETHOS CEO Kefgen. "Both gentlemen will become Executive Chairmen following their departures. However, their ultimate pay will vary greatly. Ells will most likely get very little of his $14 million valued LTIP, as the award has a performance trigger at $700 per share price (the stock is currently valued at $313). On the other hand, Schultz's pay plan allows him to continue receiving his pay as if he were the CEO."

Steve Ells of Chipotle, Greg Creed of Yum! Brands, Steve Easterbrook of McDonald's and Howard Schultz of Starbucks all made over $10M, Schultz earning the most at nearly $22M in total compensation.

"The big question: is are these CEOs worth it?" adds AETHOS' Donovan. "That is precisely what the pay-for-performance model is intended to answer."

The model factors in key financial metrics and relates it to overall pay. The outcome is an AETHOS Value Index (AVI) that grades each CEO on a pay for performance basis. With a AVI of 208, Boyd Hoback of Good Times gave investors the best value relative to his paycheck. An AVI of 100 means that a CEO was paid exactly what he or she was worth to shareholders.

"It would seem that many of the highest paid CEOs in our survey deserved their lofty paychecks," states Kefgen.

To see the entirety of the report, please click here.

Keith Kefgen

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Terry Donovan

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Leora Lanz (for AETHOS)
LHL Communications
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