Thursday, July 2, 2009

CEO/President/Chairman Pay at Steak 'n Shake & the Opinion of the Masses...

Recently, as many of you know, Sardar Biglari got a pretty big raise for his role at Steak 'n Shake. While not making any money in director's fees, not getting stock options, and not having a contract, he is still going to be the recipient of $900K/year. Being Chairman of the Board, Biglari has a fiduciary duty to the shareholders- to oversee management and set a profitable direction for the company. As CEO and President, his duty is to run the company effectively and profitably. He has done these things quite well.

Now, let's examine the facts:

1) The company had generated a ton of cash and paid off a chunk of debt.
2) The company is no longer in danger of being close to insolvency.
3) The company has introduced new (and popular) products that have helped snap 14 quarters of negative same store sales.
4) The company has become much leaner from an operational view, helping profitability.
5) There are several members of management and the board now gone, who had presided over a flawed 'expansion at all costs' policy.

First and foremost, the issue of executive pay has garnered a good discussion at the level headed value investing community Corner of Berkshire and Fairfax. My big surprise however, are the comments and commentary surrounding an article in the IndyStar. I wonder if any of the people (including the journalist) even read the 8K, which told of the raise and of the company paying off it's credit line (to the tune of $12 million) with Prudential. That action alone makes the once distant possibility of a share repurchase/dividend/acquisition a very likely development in the next year. It is also a good sign of the company *surprise* being managed rationally.

From reading the comments on the article, it seems that most of the people are angry over the pay raise in relation to hourly employees not seeing 'their share' of the company's good fortune. I surmise that the servers at the chain are doing better than they were last quarter; same store sales are up which means that they are most likely getting more in tips. If the tips are paid in cash, the additional money would probably be more significant, since they probably won't claim the wages at tax time. I fail to see how this is a bad deal for anyone, including diners, who are enjoying new and relevant products (despite some service issues- which are improving).

Not surprisingly, I am astonished at the stupidity of people that lambast a guy for making $900K (even though he turned around a restaurant chain based in their state, which brings them tax revenue), but don't seem to care that California is issuing 3,733x as much in IOU's JUST THIS MONTH! (that link comes curtousy of S. Parsad). Our priorities as a nation are really screwed up. I guess that having a gut reaction to a hot issue is easier than thinking.

On a calmer note; as much as I hate speculating on the matter, I'm betting that Biglari wouldn't have taken the raise if there were not some good news coming our way- and soon, at that.

Disclosure: Long SNS


Sivaram Velauthapillai said...

I'm left-leaning so I know the flaw that people make, especially many on the left--I try my best to educate the liberals and most on the left on this issue (I think you guys on the right, certainly the libertarian-oriented, properly understand compensation better ;)

I think there is definitely a problem with the compensation structure in USA and many other countries. However, it's not cases like this. Someone who is turning around an operation and risking a lot--their own capital perhaps, their salaries, their reputation, increase in stress, etc--in the process deserves high compensation.

I think the problem is because the public generally doesn't have detailed information on the activities carried by management. So, to them, every management is the same. They can't tell when executives are overpaid, which I believe is definitely a problem in America and Canada, and when executives are properly compensated. The matter shouldn't be the amount that someone is paid; rather it should be why they are paid what they are.

It depends on one's opinions and views but I think the public is probably justified to be critical of the millions to hundreads of millions paid to executives who run their companies into the ground (or at least don't oversee them properly). Recent examples of Citigroup, AIG, and Washington Mutual come to mind. I personally think management of those companies, who were some of the highest paid in America, were overpaid.

I can't speak for Steak 'n Shake since I don't know much about it, other than your, and a few others', writings; but someone like Steve Jobs, who was paid hundreads of millions, definetely deserves his compensation. I mean, regardless of what one thinks of Apple, it was almost bankrupt before he took over. We need more of these guys. Without them, everyone, whether it is the employees, or the citizens, or the government, will be worse off.

Unfortunately I don't know how one can overcome this problem. Like I said, even I am scratching my head over the compensation for some of those financial firms. Unfortunately, oversight of the compensation scheme is clearly failing. I think many on the right probably don't see a serious failure but I believe this is a serious problem for corporations. The flaw lies with the board of directors and this is an issue that Warren Buffett and Charlie Munger have alluded to many times. But there isn't an easy answer.

Jeff Moore said...

Good points. I too, have trouble with figuring out what I think of financial firm compensation. As a shareholder (since I pay taxes) I don't want for the executives that created the problem to have jobs, let alone get bonuses. However, I am in a rough spot since the idea of the government telling a corporation what to do is pretty appalling to me...

Regardless, we (America) have really dropped the ball when it comes to capitalism. John Bogle wrote a really good book on this a couple years back.