Why Chipotle shouldn’t tie CEO pay to stock price

Total compensation for Chipotle Mexican Grill's co-chief executive officers for 2015 was cut in half after the company dealt with multiple food safety scares. Chipotle said executive compensation will be tied to the fast-casual chain's stock performance. But is that fair?

Steve Odland, president and CEO of the Committee for Economic Development, would contend that the pay reductions are fair, saying Tuesday on CNBC's "Power Lunch" that the stock price is the outcome of the business performance. Odland, also a former Office Depot CEO, applauded Chipotle's board for taking action in light of the numerous food safety issues.

Chipotle founder and co-CEO Steve Ells,was paid $13,8 million, 52 percent less than the previous year, according to a regulatory filing. Co-CEO Monty Moran's yearly pay fell 51 percent to $13.6 million.

Steve Ells, chairman and co-chief executive officer of Chipotle Mexican Grill Inc.
Victor J. Blue | Bloomberg | Getty Images
Steve Ells, chairman and co-chief executive officer of Chipotle Mexican Grill Inc.

"I think the bigger issue is they need to fix the underlying food safety issues ... which caused the stock price hit," said Odland.

So what's the right answer? Compensation should not be based on stock price alone, said Odland.

"I think at this point in time given the severity of the issues, and the whole brand and the whole company is at risk, I would tie to it food safety and I would say nobody gets any of these stock options for three years until you prove that you have got the food safety issues addressed. You have got to put the customers first," said Odland.

Chipotle's lack of transparency about the origin of its ingredients, the company's uncontrolled growth, underprepared employees and poor management are to blame for the health scares, said Jeff Sonnenfeld, Yale School of Management senior associate dean for leadership studies, also on "Power Lunch."

Multiple contamination scares are dangerous, but so is putting too much emphasis on the stock price, according to Sonnenfeld, leading to "reckless" fire sale prices or selling pieces quickly for a stock top.

Odland echoed his concerns, saying that the ability for stock prices to be engineered has the potential to destroy the brand. Through slashing costs or buying back shares, the stock price can rise without any of the food safety issues being addressed.

Sonnenfeld agrees that in regard to compensation, food safety should be taken into consideration, but so should the traditional metrics, including shareholder returns, growth in revenue and new products.

Chipotle did not return a request for comment.