Accountability is on the rise at publicly traded restaurant companies, as chief executive compensation increasingly aligns with performance, according to the third annual study of top-executive pay conducted by HVS Executive Search exclusively for Nation’s Restaurant News.
While a quick glance at the 2012 survey of top-executive pay packages shows that there are still many top executives who are classified by the study as overpaid, more are moving closer to the sweet spot where pay and results are in balance — the report’s average value index of 100.00.
The HVS Value Index considers market capitalization, stock appreciation and EBITDA — or earnings before interest, taxes, depreciation and amortization — against a CEO’s total compensation, including base salary and long- and short-term incentives. Based on that 100.00 average, the index compares executives of similarly sized companies and peer groups. All CEOs included in the survey have been in their positions since 2010 so that they have had time to have an impact on their organizations.
“Compensation committees, shareholders — everybody is holding each other accountable,” said David Mansbach, president of the Americas for HVS, an executive search and advisory firm based in Mineola, N.Y.
Among some of the shifts reflecting the balancing out of pay and performance, Jeff O’Neill, CEO of Einstein Noah Restaurant Group, with a total compensation of $1.27 million in 2011, had an HVS Value Index of 98.05 for the year, meaning he was overpaid by nearly 2 percent. That compares to an index of 73.9 in the prior year, when he was overpaid by 26.1 percent. In both years, however, he was the least overpaid of the executives in that group.
Similarly, Michael Woodhouse, who stepped down as CEO of CBRL Group in late 2011 and retired as executive chairman in November, with a total compensation of $6.44 million in 2011, had an HVS Value Index of 95.12, meaning he was overpaid by about 4.9 percent. The prior year he fell into the underpaid group, with an HVS Value Index of 123.8, meaning he was underpaid by 23.8 percent, according to the HVS formula.
Most overpaid
Ranking as the most overpaid CEO at a public company in 2011 was Eric Gatoff of Nathan’s Famous. Gatoff received total compensation of $525,613. While that figure is less than the packages of many other executives, it earned him an index of 4.74, meaning he was overpaid by 95.3 percent given the size and complexity of his organization and its performance.
Similarly, Craig Maier of Frisch’s, with a total compensation of $730,516, had an HVS index of 4.93, making him overpaid by 95.1 percent.
“A lot of the smaller-cap companies fell off the cliff, and their CEOs were overpaid,” Mansbach said.
On the other end of the spectrum, Michael Tattersfield of Caribou Coffee was the most underpaid CEO based on performance at a public company in 2011. His total compensation of $1.89 million, in light of the growth enjoyed by his company, put his index at 196.99, meaning he was underpaid by almost 97 percent.
“That correlates to what they’ve been able to do in terms of growth,” said Mansbach.
The Minneapolis-based chain saw domestic systemwide sales rise 7.04 percent to $251 million in 2011, while its number of U.S. units grew 4.29 percent to 486, according to NRN’s 2012 Top 200 census.
Mansbach noted that many of the other executives who fell into the ranks of the underpaid also helm limited-service brands that have continued to grow. That’s been the case for notably fewer casual-dining chains.
Also noteworthy is how the number of publicly traded companies has fallen during the three years the compensation study has been conducted. The group shrank from 57 in 2012, to 50 in 2011 and then to 35 this year, as private equity firms have moved into the industry.
One of the companies missing from this year’s list is P.F. Chang’s China Bistro, whose leader Richard L. Federico topped last year’s underpaid group. The Scottsdale, Ariz.-based casual-dining chain was purchased in July by Centerbridge Partners L.P. in a deal valued at $1.1 billion.
J. Alexander’s, Benihana, O’Charley’s, Morton’s the Steakhouse and McCormick & Schmick’s are some of the other chains absent from the list because of ownership changes. Others, such as Così and Kona Grill, are missing from the list this year because of new leadership.
Next year’s list will condense further as two executives with long tenures, Doug Brooks of Brinker International and Samuel “Sandy” Beall III of Ruby Tuesday, turn the reins of their companies over to Wyman Roberts and James “JJ” Buettgen, respectively.
Pay checked
Government oversight has played a role in increasing accountability throughout corporate America.
It’s been 10 years since the Sarbanes-Oxley Act was signed into law, creating higher standards for the boards, management and auditors of public companies. Where executive compensation is concerned, the law prohibits executives from restating financial results in ways that do not comply with reporting requirements in order to boost their compensation. In such situations the CEO and CFO must pay back any incentive or equity-based pay they received because of the financial engineering. Sarbanes-Oxley also established more rules around boards, increasing the number of independent directors.
The Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law in 2010 also is influencing executive pay. The law requires that public companies allow shareholders at least once every three years to hold a vote on the compensation of the highest-paid officers. While the so-called “say-on-pay” vote is nonbinding, it must be reported, and boards are being forced to explain their pay decisions to increasingly interested investors.
In addition, companies are under scrutiny by the Institutional Shareholder Services, which in late 2011 announced a new methodology for analyzing executive pay to ensure corporate and shareholder interests were aligned.
“It’s been an interesting journey as it relates to corporate governance,” Mansbach said. “Pre-2002 it was the Wild West. There was no board accountability.”
Another shift reflected in the 2012 HVS study is the growing importance of long-term incentives. The study shows only six executives receiving no long-term incentives, and for the remaining 29 executives, those long-term incentives were more generous than their short-term incentives.
Taking the long view
“The way the old [compensation] programs were designed, it all came down to the metrics of the program, and they were very shortsighted metrics, … looking out at the next 12 months,” Mansbach said. Such programs prompted executives to put quick fixes like discounting in place instead of thinking of the long-term viability of the brands, he added.
Today, he said, “the metrics and the timing of the programs are longer term, and the compensation mix is more diversified, forcing senior leadership to think more long term.”
According to a study by Meridian Compensation Partners LLC, more companies are taking the long view.
In a study released earlier this year based on responses from 150 companies, Meridian found that 42 percent had increased the values of their long-term incentives for executives in 2012, while 50 percent said they had kept them the same as in 2011.
Related to long-term incentives, Meridian found 77 percent of performance plans were based on a three-year period, while 22 percent were based on a one- to two-year time frame. It also found that companies appeared to be shifting toward performance-based awards, with 52 percent of the value of their long-term incentives derived from performance share/unit awards, up from 47 percent in 2011.
Meridian also found that one out of four companies recently changed at least one of their corporate financial performance metrics, and two-thirds of companies reported paying out bonuses at or above their targeted value in 2012 based on improved financial performance in 2011.
Admittedly, HVS’s Mansbach said, not all restaurant companies are creating compensation with both the short and long term in mind. But, he said, “the discussion is occurring, and the concept is being implemented now with some of the better companies.”
Contact Robin Lee Allen at [email protected].
Follow her on Twitter: @RobinLeeAllen.
HVS Value Index: The chart
Methodology for calculating the executive compensation value index
The HVS Pay-for-Performance Model quantifies the performance of a given chief executive relative to his or her peers. The model incorporates standard business indicators. The simplified formula is:
HVS Value Index™ = (M + S + E) / C
The Market Complexity Factor, or M, quantifies the complexity differential of running a large-cap versus a small-cap company. It is calculated by comparing the market capitalization of the subject company to the average market capitalization of the peer group.
The Stock Appreciation Factor, or S, measures stock appreciation. It is calculated by comparing the stock appreciation of the subject company to the average stock appreciation of the peer group over a given period of time.
The EBITDA Growth Factor, or E, measures EBITDA growth. It is calculated by comparing the EBITDA growth of the subject company to the average EBITDA growth of the peer group over a given period of time.
The Compensation Benchmark Factor, or C, quantifies the degree to which a chief executive over- or under- earns his or her peer group. Compensation includes base salary, short-term incentives, long-term incentives and other compensation as required by Securities and Exchange Commission regulations. Stock options are valued using the Black-Scholes valuation model. The C Factor is calculated by comparing the total compensation of the subject executive with the average total compensation of the peer group.
In addition, each component is variously weighted to maintain consistency. Certain outliers are excluded, and a normal distribution function is applied, indexed with 100.0 as average. Variations of the model can be used for single assets, nonpublic entities and nonprofits.
HVS Executive Search is an executive search and advisory firm providing human-capital consulting services to leaders of the hotel, restaurant and gaming industries. HVS Executive Search is a division of HVS, a fully integrated consulting firm focused on the hospitality industry, with 30 offices worldwide.
