Chipotle is going to great lengths to communicate that the company's performance on all of its digital initiatives will be a defining factor in the future success of the business.
— Erika Adams
Chipotle’s executive paychecks are being officially tied, in part, to the success of the company’s digital strategy over the next couple of years.
Under the incentive award, executives will receive additional shares in the company if certain performance criteria are met over two years.
Chipotle didn’t mince words in the description of the incentive award: the potential payout depends on the company’s future digital performance, a rare compensation benchmark for the restaurant industry that is under pressure to boost digital sales.
“The [Compensation] Committee believes that the strategic importance of gaining digital market share over the next three years warranted a one-time digital transformation award as further incentive for management to achieve the company’s digital goals,” a March proxy filing stated.
The Incentive Plan
In the company’s most recent 10-Q filing in April, the digital transformation award is spelled out in further detail.
Under the terms of the agreement, executives will receive extra compensation in the form of company shares based on their performance as it relates to the following three metrics: digital sales growth, managing general and administrative expenses as a percentage of revenue, and the successful completion of key strategic initiatives.
According to the award specifics, executives have to guide the company to an undisclosed set amount of annual digital sales revenue by the end of 2020, and it’s no coincidence that Chipotle breaks out its percentage of digital sales to investors each quarter to demonstrate incremental progress. In the first quarter of 2019, Chipotle reported $205 million in digital sales, double the amount earned in the same period last year. Sales across all digital channels currently account for 15.7 percent of total restaurant sales.
“For companies to do something special or supplemental to their regular compensation program, they know they are going to face significant amount of scrutiny,” said Kathryn Neel, a managing director at executive compensation consulting firm Semler Brossy. “So, they have to be able to explain to their shareholders the purpose of the award and the shareholders are going to look to see that what they are paying for — what the company is paying for — aligns with what the company says it needs to do to turn the business around.”
There is also a set amount of general and administrative expenses as a percentage of revenue that must be achieved in the same timeframe. In its first-quarter earnings release, Chipotle reported $103 million in general and administrative expenses, up 33 percent from the same period in 2018. The figure represents 7.8 percent of Chipotle’s total revenue earned in the quarter.
Aside from the direct financial metrics, executives must also contribute to the success of strategic company initiatives. This is defined as seeing through “the successful completion of two initiatives through the state gate process” by the end of 2020.
The stage gate process is Chipotle’s term for market testing. The company established the new process last year, with intent to use it to test everything from new menu additions to digital drive-thru lanes to the implementation of the company’s new digital loyalty program, which completed the stage gate process and went to a national launch in March.
Executives at the company could receive above target payouts of up to 300 percent depending on if certain undisclosed digital sales goals are exceeded. The participants have to stay with Chipotle until early 2023 at the earliest to see the full potential award realized.
Over the past 12 months, Chipotle’s stock has posted gains of over 120 percent. Since CEO Brian Niccol joined the company in February 2018, Chipotle’s stock has gone from around $315 per share to upwards of $700 per share at its peak.
“For the avoidance of doubt, all three goals outlined above must be achieved for the performance goals to be deemed satisfied,” the filing stated. “If any of the goals is not achieved, the performance goals will not be met and no performance shares will be earned.”
A Significant Shift
Chipotle is going to great lengths to communicate both internally and externally that the company’s performance on all of its digital initiatives — delivery, online ordering, and catering — will be a defining factor in the future success of the business.
While it’s rare to see digital strategies explicitly spelled out in incentive plans for food and beverage companies, Neel noted that she’s previously seen language spelling out digital benchmarks in executive compensation programs in the retail industry.
“What was interesting to see was those who did it and those who didn’t [in retail],” Neel said. “Those who did it at the time, they got it. They understood what they needed to do. To me, it indicated a company that really got it and understood how important it was going to be.”