In an era of what many perceive as outsize executive compensation, it’s not unusual for a successful public company to lavish its chief executive with a multimillion-dollar pay package. But what happens when there are two chiefs?
In the case of Chipotle Mexican Grill, the paydays for both were supersized. Chipotle paid its founder and co-chief executive, Steve Ells, $25.1 million in cash and stock last year. It paid Montgomery F. Moran, the company’s other co-chief executive, $24.4 million. Those figures put the men, college buddies who are now running the country’s hottest fast-food chain, near the top of the charts for executive paydays.
Each man individually made more than the chief executives of larger companies like Ford, Boeing and AT&T. Together, they made more than all but the highest-paid chief executive among the country’s biggest 100 companies, Lawrence J. Ellison of Oracle.
But that is not the whole picture. Since 2011, Mr. Ells and Mr. Moran have each made more than $100 million on top of their salaries through a complex mix of stock awards. Now the pay packages and unusual co-chief executive arrangement are drawing scrutiny from investors. At Chipotle’s annual meeting in Denver on Thursday, shareholders will vote on two measures related to the company’s executive compensation.
One proposal would ratify the current compensation plan, while the other would increase the number of shares available for future grants to executives.
None of Chipotle’s top five shareholders — which include T. Rowe Price, Fidelity, Vanguard and BlackRock — would disclose how they planned to vote on the measures. Only Sands Capital Management, a private investment firm that owns 7.5 percent of the company, commented on the matter, saying, “We are aware of the debate.”
However, with rising inequality continuing to influence the country’s political conversation, some Chipotle shareholders are growing uneasy with the sums bestowed on its top bosses.
Last year, 27 percent of shareholders, including State Street, which holds a 4 percent stake, voted against the company’s compensation packages. But on Thursday, the company could face stiffer resistance.
Several small Chipotle shareholders have waged a campaign to rein in the company’s executive pay, urging other investors to stand up to Mr. Ells and Mr. Moran.
“C.E.O.s of far bigger and more complex, more profitable companies are paid less,” said Scott M. Stringer, the New York City comptroller, who oversees $150 billion in city pension plans. “They’re paid more than Lloyd Blankfein at Goldman Sachs and Jamie Dimon at JPMorgan.”
The CtW Investment Group, which advises union funds, is a vocal critic and is leading the charge.
“It’s a reckless pay structure that does nothing to appropriately incentivize management to create long-term value,” said Michael Pryce-Jones of CtW. “Their pay is out of whack however you measure it.”
And several shareholder advisory groups, including Institutional Shareholder Services and Glass Lewis, are campaigning against the pay packages, setting up the meeting on Thursday as a public test of investors’ willingness to challenge ballooning executive pay.
Investor anxiety over the pay of Chipotle’s bosses comes in a growing debate about the degree to which corporate excess is exacerbating societal inequality. Chipotle’s founder, Mr. Ells, earned 778 times the median salary at the company in 2012, the 11th highest such ratio of the top 250 companies in the Standard & Poor’s 500-stock index, according to Bloomberg.
And though general managers at Chipotle can earn upward of $100,000 a year, the average starting salary at one of the company’s 1,600 restaurants is about $21,000 annually. Earning that wage, a Chipotle employee would have to work for more than a thousand years to equal one year of the co-C.E.O.s’ pay.
“Chipotle’s pay practices are especially problematic given the disparity with front-line workers,” Mr. Stringer said.
Chipotle points to strong stock returns as justification for the pay packages. Chipotle has doubled both revenue and profits since 2009, and its stock has more than doubled over the last three years.
“It’s still the best growth story in the restaurant industry of any size,” said Jason West, an analyst at Deutsche Bank.
But by any standard, Chipotle’s co-chiefs have been among the best-paid executives in corporate America. Mr. Ells personally has received more than $145 million in Chipotle stock since 2011. Mr. Moran has received at least $104.5 million.
Much of this wealth is transferred to the two men through so-called stock appreciation rights, an unusual mechanism that has fallen out of favor with most public companies. Stock appreciation rights are similar to stock options, which give executives the right to buy shares in a company at a discount. But with stock appreciation rights, executives are granted blocks of shares when the company’s stock price increases without ever having to exercise options.
Chipotle has stipulated that the co-chiefs each receive stock appreciation rights equivalent to 0.48 percent of the company’s total equity, ensuring both men large blocks of shares each year, accounting for the huge paydays.
In its defense, Chipotle argues that because the co-chiefs are receiving stock awards, their incentives are in line with other shareholders.
But because stock appreciation rights do not require that the executives hold the stock for very long, the men can cash out quickly. Mr. Ells, for example, has received more than 600,000 Chipotle shares over the last four years and has sold more than 548,000 during that same time.
“The result is a deeply flawed pay philosophy in which the board believes perpetually sizable equity grants are necessary to refresh the ‘share of value creation’ each year as executives dispose of their stock and realize immediate gains,” CtW wrote in a letter.
Robert Jackson, a professor at Columbia University, said that stock appreciation rights were flawed because they let executives ride the soaring stock market without putting any of their own money on the line.
“We can’t call it pay for performance if it rewards rising tides and lets the execs cash out as soon as they’re ready,” he said, adding that few companies used the rights structure anymore. “They’re really using an outdated, antiquated structure. It’s not a common or preferred corporate governance practice.”
Mr. Ells turned a former ice cream stand near the University of Denver into the first Chipotle, in 1993. He quickly distinguished it from other fast-food joints by selling burritos, not burgers, and by using fresh ingredients and humanely raised animals.
Mr. Ells eventually brought on Mr. Moran, whom he had met at the University of Colorado at Boulder. Mr. Moran was elevated to co-C.E.O. in 2009.
While many investors seem unfazed by the enormous sums being awarded to management, others say the time has come for Chipotle to start treating its co-chiefs not like visionary founders but like employees overseeing a mature company.
“They’re rewarding them as if they’re still the entrepreneurs that founded this company,” Mr. Pryce-Jones of CtW said. “They’ve made a lot of money. Now they should be paid like managers.”