The Restaurant Finance Monitor, a monthly publication providing readers with an in-depth analysis of the restaurant-financing marketplace, publishes David Mansbach’s 2014 Restaurant CEO Pay-for-Performance article. Click here to view the pdf or continue reading.
When it comes to CEO pay for performance, an effective compensation program should be transparent in nature, hold an executive accountable and properly align with stakeholder interest and corporate strategy. I really don’t care about the size of the paycheck as long as he or she earns it.
At first glance, when you look at my most recent analysis, you may question Patrick Doyle’s pay package of $9,548,617. However, when you dig deeper into his performance, and the value creation he provided for his shareholders, you will appreciate how he can justify every penny he received.
This year’s CEO pay-for-performance analysis covers 37 public restaurant companies and quantifies results of a CEO relative to that of the total peer group. An AETHOS Value Index (AVI) of 100 means that performance was on par with their pay, an AVI higher than 100 suggests a CEO outperformed their paycheck, and an AVI lower than 100 translates to underperformance. Data points utilized in the value index formula include annual compensation, market complexity, stock appreciation and EBITDA growth. While the analysis below focuses on public companies, this model can be applied easily to private organizations.
A value index above 100 indicates the CEO has been underpaid compared to his peers. In a review of almost all cases, this occurs when an incumbent provides superior results. Steve Hislop of Chuy’s achieved the highest AVI of 213.0 suggesting that he was underpaid by 113%. Hislop and the other CEOs in our study who achieved an index score greater than 100 should be recognized for their great work. On the contrary, a rating less than 100 suggests poor goal setting by the compensation committee and/or underperformance by the CEO.
Click here to view the table of the Top10 Underpaid CEOs.
For example, Sadar Biglari of Biglari Holdings received a index rating of 12.3%, suggesting he should have been paid approximately $2 million. Based on his performance relative to his peers, he was overpaid by $9,592,000. Biglari’s compensation included a $10 million bonus. His bonus is calculated on 25% of the company’s increase in book value above a 6% hurdle with a $10 million cap. The shareholders of this organization have every right to be concerned and should demand more accountability of the board and CEO moving forward.
Click here to view the table of the Top10 Overpaid CEOs.
As I mentioned earlier, the concept of monitoring pay for performance can be applied to private organizations. In the simplest form, you need two types of data to analyze results: performance metrics and compensation data. As long as it is consistent from company to company, performance metrics can be any objective measurement such as enterprise value, return on investment, same store sales or unit growth. Best practice companies are digging even deeper, incorporating metrics addressing real-time industry problems such as employee turnover, customer retention, menu pricing strategies and market share.
In the past, it was easy for underperforming private company CEOs to hide behind not having to share data, but in case you haven’t noticed there has been a new sheriff in town: private equity. They are a sophisticated group of individuals and desire real-time information to ensure their portfolio companies are performing. I can assure you they are very willing to share necessary data to understand how their CEOs are performing and are holding these executives accountable for results.