The current recession will deliver a heavy blow to the restaurant industry and therefore force executives to alter their strategic mindset. CEOs must be nimble during these tough times, staying alert to the rapidly changing environment and the progressive recession that is crumbling the U.S. economy. With all the future uncertainties, executives and shareholders will likely be asking the same questions: When will consumer spending improve? How long will it take for financial markets to recuperate? The slowdown of franchise financing from institutions like GE Capital, the largest lender in the industry, will only make it more challenging for restaurant companies to grow in 2009.
Because a growth-based strategy is less viable during this climate and therefore worrisome to shareholders, CEOs should adopt a “getting back to basics” approach which includes reorganizing, cost cutting, and becoming more operationally efficient. Since stock prices and revenues will continue to drop, so should overhead, operating expenses and the cost of goods sold. Shareholders and analysts will perceive this approach as cautious and therefore appropriate considering the current economic state. Executive performance metrics that are tied to growth by units and growth by revenue won’t be as relevant in 2009.
To proceed thoughtfully into the New Year, we analyze the top performing CEOs from 2008 to determine what made them outperform the competition. AETHOS developed a model that relates pay to performance by considering four metrics over a three-year period. We measure EBITDA growth, market capitalization, stock appreciation, and then compare that to total compensation. The result is a pay-for-performance index, which is based on an average score of 100 and determines whether or not a CEO was paid appropriately as compared to his or her peer group. An AETHOS Value Index® of less than 100 means that the CEO underperformed the market average, while a score greater than 100 means the CEO’s performance was better and he/she was therefore underpaid.
In this year’s survey, we selected 53 Chief Executive Officers of publicly traded restaurant companies who made at least $200,000 in total compensation.
Based on our pay-for-performance model, the top performer in 2008 was Joel A. Schwartz of Benihana Inc. Mr. Schwartz received a pay-for-performance rating of 211.2, demonstrating that he was underpaid by 111.2% or nearly $11.9 million.
Other top performers include Eric Gatoff of Nathan’s Famous Inc., Marcus Jundt of Kona Grill, Gerald Deitchle or BJ’s and J. Clifford Hudson of Sonic Corp. Rounding out the list of top ten include Steve Ells of Chipotle Mexican Grill Inc, Christopher Pappas of Luby’s, Sally Smith of Buffalo Wild Wings Inc, Ronald Shaich of Panera Bread Co. and Lonnie Stout of J. Alexander’s Corp.
The companies with the highest overall stock appreciation from December of 2004 to December of 2007 included Chipotle, Nathan’s, Benihana, Papa John’s and Grill Concepts. Overall, however, restaurant stock values have declined over the past three years and especially in 2007 and 2008. For example, Benihana was a top appreciator from 2004-2007, but has lost 83% of its market value in 2008.
Top Salaries & Bonuses
The average CEO salary for 2007 was $610,170 compared to $521,941 in 2006. David Novak of Yum! Brands topped the list at $1.3 million. Rounding out the highest salaries are James Skinner of McDonald’s, Samuel Beall III of Ruby Tuesday, Larry Flax and Richard Rosenfield of California Pizza Kitchen and John Chidsey of Burger King, all of whom earned at or above $1 million in base salary.
The average bonus this year was $638,587 compared to $418,813 in 2006. Michael Woodhouse of CBRL Group earned the highest bonus at $7.075 million. Other CEO’s that received top bonuses include David Novak of Yum! Brands, James Skinner of McDonalds and Andrew Puzder of CKE Restaurants. Because most bonuses are ties to company profitability for metrics like earnings per share and stock price, the average bonus will likely decrease by next year’s survey.
Top Stock Incentives
David Novak of Yum! Brand earned the highest stock incentive at $9.26 million, compared to Tilman Fertitta of Landry’s Restaurants who received $11.4 million in 2006. Other CEOs at the top of this list include James Donald of Starbucks, Samuel Beal III of Ruby Tuesday and James Skinner of McDonald’s.
Not surprising based on our other metrics, the richest CEO in the restaurant industry is David Novak of Yum! Brands with a fortune of $258 million. Following closely behind are David Overton of The Cheesecake Factory, James Skinner of McDonald’s, Ronald Shaich of Panera Bread, and James Donald of Starbucks.
There is no doubt that there will be a halt in performance bonuses this year and next. CEOs must be in survivor mode and cast an optimistic outlook on the entrenched gloom within the boardroom. Staying positive and upbeat will trickle down to the executive team giving them a glimmer of hope while stock prices fluctuate day-to-day. Growth and profits will come from being prudent with corporate spending while motivating everyone to do the same.
View the 2008 US Restaurant Industry CEO Survey here.