U.S. Securities and Exchange Commission
Washington, DC 20549
NOTICE OF EXEMPT SOLICITATION
1. Name of the Registrant:
CHIPOTLE MEXICAN GRILL, INC.
___________________________________________________________________________
2. Name of the person relying on exemption:
CTW INVESTMENT GROUP
___________________________________________________________________________
3. Address of the person relying on exemption:
1900 L STREET, NW, SUITE 900 WASHINGTON, DC 20036
___________________________________________________________________________
4. Written materials. Attach written materials required to be submitted
pursuant to Rule 14a6(g)(1):
CtW INVESTMENT GROUP
April 21, 2014
Please vote AGAINST the "Say-on-Pay" proposal at Chipotle Mexican Grill,
Inc. (NYSE: CMG) on May 15, 2014.
Dear Chipotle Shareholders:
We urge you to VOTE NO on the Advisory Vote to Approve Executive
Compensation ("Say-on-Pay") at the annual meeting of shareholders on May
15, in light of pervasive pay problems, which include:
- One of the worst pay-for-performance profiles in the Russell 3000,
according to Equilar, with our co-CEOs each receiving $25 million in
total grant date value compensation in 2013 and three-year realizable
pay exceeding $144 million (~$300 million combined!).
- Pay levels that are disconnected from attracting and retaining key
talent.
- A flawed approach to incentive compensation, due to, among other
things, the use of excessively generous grants of stock only stock
appreciation rights ("SOSARs") as the co-CEO's actively dispose of
stock holdings.
- The ongoing failure to address investor concerns over this pay structure
following notable oppositional votes on "say on pay" in prior years, and
indications that equity grants could be even larger going forward.
The CtW Investment Group works with pension funds sponsored by affiliates of
Change to Win - a federation of unions representing over six million
to enhance long-term shareholder value through active ownership. These funds
have $250 billion in assets under management, and are substantial Chipotle
shareholders.
PAY QUANTUM TRUMPS PERFORMANCE
Even Chipotle's share performance cannot justify its pay levels. Chipotle
ranks among the 5 worst pay offenders in the Russell 3000, with its CEO pay
over the past 3- and 5-year periods vastly outweighing, on a peer relative
basis, its total shareholder returns over the same time-frames, according to
Equilar, a research service that scores companies on their pay-for-
performance. This holds true whether using a 3-year grant date value
estimation of pay - $60 million - or a realizable pay valuation - $144
million. In actuality, however, under Chipotle's expensive and co-CEO
structure, "all-in CEO" pay is even higher, with co-CEOs Steve Ells and
Montgomery Moran each receiving more than $60 million in grant
compensation over the past 3 years. Their collective compensation of
approximately $50 million in 2013 would place them 10th on a list of
Russell 3000's highest paid CEOs; and based on Capital IQ reportinGg/1/
of co-CEO pay, Messrs Moran and Ells represent the most expensive
co-leadership team in the Russell 3000.
PAY LEVELS APPEAR UNRELATED TO ATTRACTING AND RETAINING KEY TALENT
With compensation for just one half of our co-CEO team consistently around
5 times the peer median for companies run by a single CEO, it is difficult
to believe these compensation levels are necessary for retaining key
personnel - particularly as Mr. Ells is the Company's founder. Indeed,
including the sizable compensation paid to our other named executives,
total reported compensation in 2013 exceeds $67 million for these five
executives! For perspective: this is 42% more than the reported 2013
compensation for the named executive team at Coca-Cola Co., one of the
world's largest consumer goods and services companies, and almost as much
as paid at General Electric Co ($73.6 million). - a company with not only
45 times the revenue and 34 times the operating income of Chipotle, but
arguably one of the most organizationally and operationally complex
companies in the world. Particularly
____________________
/1/ The Capital IQ pay data are based on the most recent information
available at the time the data was collected (April 13th) and thus for
companies yet to report 2013 compensation will be based on 2012
compensation data.
1900 L Street, NW, Suite 900 Washington, DC 20036
202-721-6060
www.ctwinvestment group.com
striking here is that our CFO Jack Hartung was paid between $3.3 million and
$2.6 million more than his counterparts at Coca-Cola and GE in 2013, which
made him the 58th highest paid CFO in the Russell 3000 even though
Chipotle's revenues rank 663rd in the index.
Indeed, despite having served as Chipotle CFO for 12 years and presumably
having had ample time to relocate to Denver, Mr. Hartung is receiving
$50,000 for travel between his home, the location of which is undisclosed
in the proxy statement, and the company headquarters, as well as $30,000
in housing costs each year. Outside of new-hire packages - which are
typically temporary and designed to cover a transition period - living
expenses and commuting costs should not be covered by shareholders.
Similarly, it is noteworthy that shareholders are reimbursing Mr. Moran,
a long-time resident of the company's hometown, Denver, for up to $25,000
in schooling expenses for his children.
By almost any measure Chipotle suffers from a bloated pay structure.
Critically, this matters to Chipotle investors not only from both pay-for-
performance and corporate governance perspectives, but also from the
standpoint of human capital management. The 10-K reports that creating an
"employee culture" is part of the unique strategic vision these executives
have brought to the company and both the 10-K and the proxy statement
(including as part of the annual incentive plan) stress Chipotle's focus
on developing a "restaurateur culture."
However, an April 2013 Bloomberg analysis of CEO-to-worker pay ratios/2/
ranked Chipotle with the 11th highest ratio out of the S&P500's top 250
companies - with co-CEO Ells receiving 778 times the median salary at
the company. This huge disparity could put at risk the company's unique
employee culture. In fact, it appears an outright contradiction to be
justifying exorbitant pay levels and benefits for the executive team on
the basis of their unique fostering of "employee culture" when the
resulting CEO-to-worker pay ratios risk undermining that culture.
Furthermore, in an analysis on human capital management and corporate
performance, available on our website, we identified a clear negative
relationship between large and growing CEO-to-worker pay ratios and
future shareholder returns.
POORLY STRUCTURED AND OUTSIZED EQUITY GRANTS DRIVE PAY FOR PERFORMANCE
DISCONNECT
The pivotal flaw in Chipotle's compensation is what Institutional
hareholder Services described in its 2013 report as the company's
"perpetual sizable grant" of equity to top executives each year in
order to "refresh their share of shareholder value creation," even as
they actively dispose of their existing shares. ISS termed this a
"conveyor-belt" approach to equity compensation.
Critically, rather than targeting a projected economic value for the
annual grants of stock only stock appreciation rights ("SOSARS") to
xecutives that can be benchmarked against target incentives at peers,
the pay philosophy over the past three years has been to reserve a
portion of future shareholder value creation for the executives by
granting them awards equal to a fixed percentage of the outstanding
shares each year - between 0.48% (for the co-CEO's) and 0.05%. As
Chipotle's share price has enjoyed strong appreciation, these awards
have driven the pay levels that are, as we discussed above, no longer
remotely necessary to retain and attract talent. The Compensation
Committee defends its approach by claiming that any reduction in the
number of shares covered by the awards compared to previous years would
"effectively decrease the proportion of shareholder value creation
reserved [and] therefore represent a reduction in the compensation
potential of the awards;" but this neglects the long-run alignment equity
awards are supposed to foster between the upside opportunities of
shareholders and executives through the steady accumulation of equity by
the executives as prior awards vest.
INSIDER SELLING UNDERMINES INCENTIVES
____________________
/2/ April 30, 2013 "Top CEO Pay Ratios," Bloomberg; available at
http://go.bloomberg.com/multimedia/ceo-pay-ratio/
THIS IS NOT A SOLICITATION OF AUTHORITY TO VOTE YOUR PROXY. PLEASE DO
NOT SEND US YOUR PROXY CARD AS IT WILL NOT BE ACCEPTED.
The problem, however, is that active selling by the co-CEOs, including
soon after vesting or well before the expiration date, has undercut the
role accumulated awards should provide in creating a valuable stake in
future value creation. Over the past four years, in open market sales,
Mr. Moran has sold 316,000 shares - equal to more than half of his
targeted SOSARs awards granted between FY 2011-FY 2013, while Mr. Ells
has sold 548,000 shares - or more than 90% of his targeted SOSAR awards
- over the same time-frame. The result is a deeply flawed pay philosophy
in which the board believes perpetually sizable equity grants are
necessary to refresh the "share of value creation" each year as
executives dispose of their stock and realize immediate gains.
Unfortunately, rather than soothing investor concerns over the pay
design, the use of performance-vesting criteria on half of the SOSARS
only further betrays the shortcomings in Chipotle's pay practices. As
disclosed in the proxy statement, the 2011 performance-vesting SOSARs
were contingent on cumulative adjusted cash flow from operations of at
least $975 million between the beginning of fiscal 2011 and the end of
fiscal 2014. However, with this hurdle satisfied just two years into
the performance period, there is every reason to be skeptical of the
robustness of this performance hurdle. Indeed, the performance
share awards, which play a secondary role to SOSARS in the company's
long-term incentive plans, carried a far higher target for cumulative
adjusted cash flow from operations - $1.489 billion - over the shorter,
but overlapping, 3-year period from Q42010 to Q42013. Even here, the
company exceeded this target - although detailed disclosure of the
adjustments made to cumulative cash flow from operations would benefit
investors given that the company's cash flow statements report just
$1.3 billion in cumulative adjusted cash flow over this period.
COMPENSATION COMMITTEE REFUSES TO ADDRESS INVESTOR CONCERNS
Despite notable votes against say-on-pay in 2012 and 2013 - 21% and 27%
respectively versus circa 10% for the Russell 3000 on average - the
Compensation Committee has each time determined that the votes do not
"warrant significant changes" to the company's pay practices. Even more
worrying, however, is that for 2014, the company appears to have
actually increased the size of the equity grants to the co-CEOs, with
the February 2014 award comprising 86,000 time-vesting options versus
the 75,000 granted in each of the past three years.
We urge you to join us by voting AGAINST approval of the advisory vote
on executive compensation (Item 2 on the ballot). Investors should note
that no incumbent member of the Compensation Committee is up for
re-election this year.
If you would like to discuss our concerns directly with us, please
contact my colleague Michael Pryce-Jones at (202) 721-6079 or at
Michael.Pryce-Jones@changetowin.org.
Sincerely,
/s/
Dieter Waizenegger
Executive Director, CtW Investment Group
THIS IS NOT A SOLICITATION OF AUTHORITY TO VOTE YOUR PROXY. PLEASE DO
NOT SEND US YOUR PROXY CARD AS IT WILL NOT BE ACCEPTED.