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Starbucks shareholders deliver a rare rebuke on compensation

The coffee giant’s investors rejected its advisory “say-on-pay” proposal amid concerns about a $50 million retention bonus to CEO Kevin Johnson.
Photo courtesy of Starbucks

Starbucks CEO Kevin Johnson saw his pay decline last year by $4.6 million, to $14.7 million in salary and stock awards.

But it didn’t keep the company’s shareholders from doing something they rarely do: vote against executive compensation. At the Seattle-based coffee giant’s annual meeting on Wednesday, the company’s shareholders voted against an advisory “say-on-pay” proposal.

At issue, apparently, is a retention plan approved in December 2019. Starbucks revealed a plan to give Johnson and then-COO Roz Brewer retention bonuses based on the company’s performance over three years.

Johnson in that plan was to get up to $50 million based on Starbucks’ shareholder return performance over a three-year period between Oct. 1, 2019, and Sept. 30, 2022. Brewer, who has since gone on to become the CEO of Walgreens, would have received up to $10 million.

The idea was to retain the company’s “key leaders in their roles for at least the next three years by providing compelling upside reward opportunity beyond the company’s regular compensation program.”

Shareholders of publicly traded companies vote on executive compensation every year, and they usually are OK with it.

According to the Harvard Law School Forum on Corporate Governance, 97.7% of companies on the Russell 3000 Index received at least majority support on their say-on-pay vote, and 93% received 70% support.

The study found that “problematic pay practices,” the relationship between pay and performance, shareholder outreach and disclosure, the rigor of performance goals and special awards tend to be the most important factors behind the failure of say-on-pay votes.

One notable failure of a say-on-pay vote in the restaurant space took place in 2014, when shareholders rejected the compensation of the top executives at Chipotle Mexican Grill—the company’s co-CEOs at the time, Steve Ells and Monty Moran, received nearly $50 million combined in 2013.

Starbucks stock has nearly doubled since Johnson took over as chief executive in December 2016. They’re also up nearly 10% from the chain’s pre-pandemic peak. The company’s sales have largely turned around since the outset of the pandemic—when its same-store sales plunged 40% as many of its locations were closed.

At the same time, however, proxy advisory services ISS and Glass Lewis recommended against the proposal. Institutional investors frequently follow the recommendations of such firms. The firms, in particular, questioned the $50 million retention bonus, saying the company did not provide adequate rationale for the award. 

Starbucks disagreed in a subsequent filing, saying the award "was carefully considered ... with a clear rationale believed to serve the long-term interests of all our stakeholders." Starbucks noted that the same package was included in the company's say-on-pay proposal last year, when 84% of shareholders endorsed the package. In a statement, Starbucks board member Mary Dillon defended the retention awards, but also said that the company would talk with its investors to understand their views.

“The board unanimously supported the performance-based retention awards granted to our executives in late 2019,” she said. “this award, which is earned through exceptional company performance over time, is consistent with our commitment to shareholder value creation and pay-for-performance philosophy.”

“Continuity in Kevin’s role is particularly vital to Starbucks at this time as the company navigates a global pandemic. Kevin and the executive partners he has assembled continue to advance our highly successful ‘Growth at Scale’ agenda, including a market capitalization increase of $21 billion since Oct. 1, 2019, the beginning of the performance period of the award. Our board and management team will continue to engage with investors in the months ahead to understand their perspectives as part of our ongoing evaluation of our executive compensation programs.”

UPDATE: This story has been updated to include a comment from Starbucks.

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