Review the news article below and respond to the questions
that follow.
Chipotle’s CEOs Have Taken a Huge Paycut
Phil Wahba
Mar 14, 2016
http://fortune.com/2016/03/14/chipotle-bonus/
Chipotle
Mexican Grill’s (cmg, +1.35%) top bosses have extra reason to make sure the
burrito chain recovers from its year of food safety mishaps: their
compensation.
Last year, the
fast-service restaurant chain was rocked by an E.Coli outbreak that closed
dozens of restaurants and made headlines for months, decimating its sales
results and keeping diners away for months: last quarter, same-restaurants
sales (which exclude the impact of newly opened or closed outlets) fell 15%. It
was also hurt by norovirus outbreaks at two Boston-area restaurants, the most
recent case occurring last week.
Those
incidents, as well as a federal probe into its food safety practices, have
weighed on Chipotle’s shares, which remain about 33% below pre-crisis peaks, a
tough reversal of fortune for the one-time Wall Street darling. (They are now
trading in the low $500-range, up from around $400 at the trough in December as
the crisis seems to be ebbing, last week’s norovirus case notwithstanding.)
So now,
Chipotle’s brass will future compensation tied directly to the company’s share
price performance, according to a filing with the U.S. Securities and Exchange
Commission.
In the filing,
Chipotle’s board said that share prices would have to return to above $700 for
30 straight days to trigger the new stock awards, meaning shares have to rise
40% or so for those incentives to kick in.
“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,” lead director and compensation committee chair Neil
Flanzraich said in a letter to shareholders included in securities filing.
Chipotle’s
co-CEO’s, Monty Moran and Steve Ells, have already been dinged by the food
safety crisis: neither received bonuses for 2015, so their total compensation
fell by about half each.
Use the Rothaermel
6th edition textbook pages 468-469 to review how Executive
Compensation can be used as a governance mechanism and answer the questions
below.
1. Explain how the changes relating to
bonuses of executives (agents) help better align agent interests with
shareholder (principals) interest.
2. What types of unintended consequences
might occur by setting the target stock price so high above the current price
before executives qualify for bonuses?