Report: latest CEO pay packages emphasize incentives

Nation's Restaurant News,  Nov 19, 2007  by Dina Berta

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MINEOLA, N.Y. -- A new snapshot of chief executive pay packages at publicly traded restaurant chains shows apparently growing emphasis on cash incentives and stock awards since federal securities regulators began requiring companies to disclose details of compensation packages for top executives and directors.

As companies' 2007 proxy statements conforming to the new requirements became available, HVS Executive Search, a headhunter firm based here that also consults on compensation for hospitality clients, examined the pay practices of 60 restaurant companies. The HVS study found that compensation plans of a majority of the companies now seem to de-emphasize base salary. Instead, the plans feature lucrative long-term incentives like stock awards and options as well as short-term windfalls like cash bonuses tied to performance that grow as companies increase in size.

"Shareholders and activists are savvier," said David Mansbach, HVS' managing director for the restaurant division. "Compensation committees want to put together a program that makes sense and is strategic now that it's easier for everyone to see."

Compensation experts share the view that incentive pay components increasingly are moving toward overtaking base-salary amounts, although the non-retroactive U.S. Securities and Exchange Commission disclosure rules prevent analysts from making detailed comparisons of pay packages for 2006 with those from prior years.

Nonetheless, in the wake of the new disclosures, some companies have come under fire for what critics view as excessive compensation.

For example, the shareholder advisory firm Proxy Governance Inc. recently criticized the pay package for Tilman Fertitta, chief executive of Landry's Restaurants Inc., as being "out of line" with those of comparable companies.

The firm said Fertitta's pay last year was 351 percent above the median for chief executives of "peer companies."

Houston-based Landry's owns some 180 restaurants in about 30 states, including the Landry's Seafood House, Rainforest Cafe, Chart House and Saltgrass Steakhouse chains and two Golden Nugget hotel-casinos in Nevada.

Fertitta received a base pay of $1.4 million, a $1.5 million bonus, $883,409 in other compensation, and $11.4 million in stock awards. His total compensation was $15.3 million.

He also was ranked by the HVS study as the highest-paid chief executive of the 60 surveyed in terms of total CEO compensation. No. 2 was James Donald of Starbucks Coffee Co., at $13.7 million, who oversees the Seattle-based Starbucks system's more than 14,000 coffeehouses worldwide.

No. 3 was Jim Skinner of McDonald's Corp., at $12.7 million. The Oak Brook, Ill.-based company and its franchisees operate more than 30,000 restaurants.

David Novak, chief executive of Yum! Brands Inc., was No. 4 in HVS's ranking, with annual compensation last year that totaled $12.4 million. Yum, based in Louisville, Ky., is the parent of such brands as KFC, Taco Bell, Pizza Hut and Long John Silver's that total more than 34,000 units.

Fifth-highest in chief executive compensation was John Chidsey of Burger King at $11.7 million. Miami-based Burger King and its franchisees own more than 11,100 restaurants.

The HVS report looked at base salary, nonequity incentives, bonuses, stock awards, option awards and all other compensation to calculate total compensation for the 60 companies' chief executives.

Their median base salary was $515,000, which accounted for 40 percent of the total CEO compensation. Long-term incentives in the form of stock and option awards comprised the second-largest component, representing 36 percent of the total, or an average of $470,161.

The median short-term incentives of nonequity rewards and bonuses were 22 percent of total compensation on average, or $286,500.

The report also divided companies into three groupings by market capitalization as of Oct. 4 to examine salary differences according to the size of restaurant chains. Based on shares outstanding, companies were grouped by aggregate stock values less than $250 million, between $250 million and $1 billion, and greater than $1 billion.

Base pay was a greater percentage of total compensation for chief executives of smaller companies, but as companies increased in market cap size, so did the percentage of long-term incentives as a part of total compensation.

Among the smaller companies, base salary was 55 percent of a chief executive's total compensation, with an almost even split then between short- and long-term incentives.

For the midsize companies, all three components were almost evenly split.

But in larger companies, base salary was only a quarter of total compensation; long-term incentives were 41 percent of the total compensation while short-term incentives were 26 percent.

"You want these individuals thinking short-term and long-term," Mansbach said. "It's harder to be objective on a longer-term strategy. if [long-term] incentives are not tied to your compensation program."