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Why did Chipotle give top executives retention bonuses?

The Bottom Line: Payments to CFO, CMO to stick around during CEO transition probably not necessary.

jonathan maze blog

Last week, Chipotle Mexican Grill said in a federal securities filing that it has agreed to pay retention bonuses to a pair of top executives in the wake of news that its founder and CEO, Steve Ells, would soon step aside for a replacement.

CFO Jack Hartung is receiving a retention bonus of $1 million.

Chief Marketing and Strategy Officer Mark Crumpacker, meanwhile, is receiving $600,000.

The bonuses become payable on the first anniversary of the hiring of a new CEO and “are intended to encourage the employees’ continued service to Chipotle” during the search for a new CEO.

They also serve as a reminder of Chipotle’s historically high pay practices.

Retention bonuses to key executives at a time of change are commonplace in corporate America and in the restaurant industry. It’s common for top executives to get such bonuses when companies go through problems like a bankruptcy or they are to be sold, though it’s relatively rare to see them in CEO changes.

Theoretically, Chipotle is working to keep a pair of executives who have long worked with Ells on board, while providing them some protection in the first year after a new CEO comes on board—meaning Ells’ replacement won’t be so quick to give the boot to a CFO once he or she takes over. Both executives get their bonuses if they’re dismissed without cause.

But Chipotle also risks limiting its new CEO. New chief executives routinely make major changes in management after taking over. Much of McDonald’s executive ranks have changed since Steve Easterbrook took the helm in 2015, for instance.

Why force a new CEO to keep on board two people who long worked under his predecessor? Especially when that predecessor will be watching their every move as executive chairman?

It’s also worth noting that the company is struggling to come off of a historically awful decline in unit volumes in 2016 after a series of foodborne illness outbreaks. Spending $1.6 million to retain a pair of executives who have been with the company during this period seems to be an odd decision.

Indeed, retention bonuses for executives tend to inspire mixed views from consultants and others, who often believe they are unnecessary.

“The money is rarely well spent,” Sabine Cosack, Matthew Guthridge and Emily Lawson wrote for the consulting firm McKinsey in 2010.

They argued that recipients often would have stayed anyway, and the spending focuses on “high flyers” while overlooking more normal performers whose jobs are nonetheless critical for success in any field.

In 2016, the home goods retailer Pier 1 agreed to make retention payments to executives following the retirement of its CEO, a move that generated criticism at the time from an activist investor.

To be sure, Chipotle has gone through a lot of challenges, and keeping Hartung and Crumpacker assures that, for at least a year, the company will have some continuity while keeping a pair of executives with a lot of institutional knowledge.

Investors sure don’t seem to care—the company’s stock rose slightly on Tuesday, the first day of trading following the news. The stock rose slightly again on Wednesday.

And the bonus payments remind potential Ells replacements that the company pays an awful lot.

Chipotle paid Ells $15.7 million in 2016, the year the company’s average unit volumes plunged by 23% in what was a historically bad year for the burrito chain. The company famously paid Ells and Monty Moran nearly $28 million each as co-CEOs in 2014 before shareholders got angry.

That potential payday on its own could lure a top-notch CEO to the company, even if that CEO isn’t Domino’s outgoing chief executive Patrick Doyle.

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