Sardar Biglari exerts considerable control over the company over which he is chairman, Biglari Holdings. He controls two-thirds of its stock, most of which was purchased with company funds and then voted as he owns them personally.
That level of control raises eyebrows as it is. But they get raised particularly high when it comes to various incentive agreements he has with the company he controls—including an incentive fee for investments made by his hedge fund for the company, and another “service agreement” with said hedge fund. Oh, and we probably should mention his incentive fee as CEO of Biglari Holdings and the relatives he employs.
But the company has made some adjustments in one incentive agreement that will make it more challenging for him to get paid, at least soon. In the process, the company is putting forth a bit more of an argument for why it has these deals in the first place.
Biglari Holdings owns Steak n Shake, which dates back to Biglari’s proxy fight win against the company, after which he wrested control of the brand and named it after himself. Eventually, he placed many of the company’s investments under the control of his own hedge funds, Biglari Capital and The Lion Fund, and agreed to an incentive fee equal to arrangements made by hedge fund managers.
Biglari is paid three ways for his work with Biglari Holdings: His regular salary, which includes a bonus; an incentive fee for his hedge funds’ investments and a service agreement.
The hedge funds receive a fee equal to 25% of the increase in the investment funds’ value over a 6% “hurdle” rate.
“Unlike the typical arrangement in the industry, Biglari Capital does not receive any fees based on assets under management,” the company says in its proxy filing. “Its fees are predicated solely on investment gains.”
These days, those investments are largely concentrated in two holdings, Cracker Barrel and Biglari Holdings itself, though it does own a few shares in Berkshire Hathaway, the investment firm run by Warren Buffett. He has not received an incentive fee for five years.
He could have earned a $1 million fee based on last year’s improvements, but for one change: The arrangement was amended so that he would not get a bonus until it recovers prior years’ losses. Thus, he won’t get a fee this year and won’t get one until the investments recover $141 million worth of losses.
“Such an arrangement is virtually unheard of in the hedge fund universe, where there is both a management fee and a fee based on a percent of profits,” Biglari Holdings wrote in its filing.
Ah, but it’s not like Biglari isn’t paid anything. The service agreement pays “Biglari Enterprises” $8.4 million a year.
The company argues that this fee saves it on the cost of selling, general and administration expenses, arguing that “in the fiscal year-end prior to the time current management assumed responsibility” totaled $57.5 million.
SG&A costs have, indeed, declined in recent years, to $57.2 million from $88.9 million two years earlier. That $57.2 million represents 21% of total revenue. By contrast, the mostly franchised Jack in the Box spends 31% of its sales on SG&A.
It’s the most vigorous defense the company has made of the service agreement, which coincided with poor performance of the investment funds.
Biglari himself gets a $900,000 salary. He is also eligible for another bonus similar to the hedge funds’ fees, based on the company’s book value. That fee hasn’t been paid in years, either.
Biglari has received well over $100 million from the company over more than a decade in various incentives and salary. His extreme payouts have languished more recently as the investments struggled and Steak n Shake struggled, making it harder for him to make acquisitions.
Still, he remains a well-paid CEO thanks to that service agreement, which combined with his salary earned him $9.3 million last year.
In addition, Biglari has some relatives receiving paychecks from Biglari Holdings. His brother, Shawn, is a senior vice president of franchise partnerships and received $402,476 last year. His father, Ken, is a consultant and was paid $160,000.