Chipotle Mexican Grill

Proxy published: 3/27/2015 Annual Meeting: 5/13/2015

Two Chipotle burritos means a lot of calories, and two CEOs means a lot of money. Despite shareholders opposition to pay at Chipotle in last year’s annual say on pay vote, the company’s two CEOs each received increased compensation: it rose to $28,924,270 for Chairman and co-CEO Steve Ells, and $28,153,203 for co-CEO Monty Moran. Ellis took home another $41 million through the exercise of stock options, which is, as they say, a lot of guacamole.

As noted in our report, in May 2014, shareholders of Chipotle Mexican Grill Inc. opposed the company's CEO compensation package by 77% (23% supporting) in a say-on-pay referendum, one of the lowest levels of support received at any company. The vast majority of mutual funds voted against the say-on-pay proposal at Chipotle (55 of the 71 fund groups that reported votes on this resolution). There were eight fund families that had a split vote with some cast for and others against, and eight fund groups surveyed voted all their shares in favor of the say-on-pay proposal at Chipotle: Artisan, Berkshire, Federated, Harbor, Lord Abbett, Steward, TIAA-CREF, and Waddell & Reed.

The company made plans to alter its compensation recipe in response to the equivalent of the worst Yelp review ever, by:

• Reducing grant date value
• Moving from grants based on fixed number of shares to market value on grant date
• Revising framework to base vesting on performance vs. restaurant industry peer group
• Adopting three-year cliff vesting (subject to performance) to create greater alignment

The company notes, however, that “compensation decisions for 2014 were made early in the year, before we filed our proxy statement for the annual meeting and received the say-on-pay vote. Consequently, the amounts and awards reflected in the compensation tables beginning on page 64 reflect decisions made before the 2014 say-on-pay vote.”  In other words, the results of the changes will be in the 2015 package voted in 2016.

However, it should be noted that shareholders had been expressing dissatisfaction with the pay package at Chipotle’s for a number of years. In 2012, 79% of shareholders voted in favor of the proposal, a relatively low level of support, but the board decided that the response “did not warrant significant changes to our determinations of executive compensation.”  In 2013, the number declined again to 73%, and the phrase was repeated (with a bit more of a defensive preamble.)  The 2014 vote apparently did get the board’s attention, but may be too little, too late. Timely response to shareholders frustration should be as key as timely response to customers.

Say on pay is non-binding, but the company has a management proposal that is binding: shareholders will vote to approve the amended and restated Chipotle Mexican Grill, Inc. 2011 Stock Incentive Plan to increase the number of shares authorized for issuance and make other changes. A shareholder proposal later in the proxy characterizes the performance criteria included in the prior plan (and little changed for this one) “so vague or multitudinous as to be meaningless.”

In addition to increasing the number of shares, another significant change to the plan will be to allow consultants and advisors to receive equity under the plan – a feature that hints at the changing world of work.  In olden days (a few years ago), if you valued someone’s work enough to want to give them equity, you would actually hire them.

Also on the proxy menu this year are management proposals to remove plurality vote for directors and get rid of supermajority voting requirements. There’s a shareholder proposal on proxy access, and a number of proposals on compensation matters.

Compensation proposals call on shareholders to adopt a policy that all equity compensation plans submitted to shareholders for approval under Section 162(m) of the Internal Revenue Code will specify the awards to senior executive officers only that will result from performance. This policy shall require shareholder approval of quantifiable performance metrics, numerical formulas and payout schedules (“performance standards”) for at least a majority of awards to the senior executive officers.  An alternate proposal is offered with specific metrics that the company believes will be too restrictive.

An additional proposal suggests that “there shall be no acceleration of vesting of an equity awards granted to any named executive officer, provided, however, that the board’s Compensation Committee may provide in an applicable grant or purchase agreement that any unvested award will vest on a partial, pro rata basis up to the time of the named executive officer’s termination, with such qualifications for an award the Committee may determine.”

And another proposal calls on the company to “adopt a policy requiring that senior executives retain a significant percentage of shares acquired through equity compensation programs until reaching normal retirement age or terminating employment.”

Shareholders who feel the board acted too slowly on compensation changes thus have many ways to get that point across at this year’s meeting.