Letters and Opinion

Bait and switch at Biglari Holdings?

May 15, 2010

In light of Biglari Holdings’ recent decision to implement a new incentive bonus agreement for its CEO and chairman, Sardar Biglari, I am concerned.

The current system, as proposed, runs contrary to the ethos Mr. Biglari claimed to have when nominating himself for election to the board of Steak n Shake (now known as Biglari Holdings).

It wasn’t long ago that Mr. Biglari sang a different tune on compensation. When trying to win the hearts of Steak n Shake shareholders and gain a seat on the company’s board he voiced a strong opinion on how executives should be compensated:

“In our assessment, the variable element of the compensation package should be tied to the executives’ ability to generate free cash flow and to earn a high return on invested capital.”

Biglari continued: “The current compensation arrangement is askew, so that even if the company performs below its competitors, management and directors will stand to gain.”

The proposed compensation arrangement, applied retroactively to prior Steak n Shake management, would increase the very rewards Mr. Biglari claimed, at the time, were excessive in light of management’s poor performance and value destruction.

I suspect Mr. Biglari’s thinking towards compensation has changed now that he’s in charge. How else could he desire a pay package that violates his own, purported, tenets? The package as proposed could easily reward him handsomely in the event the company performs below its competitors. And the proposal uses the notion of equity rather than invested capital.

I believe the current framework the board has put in place can, if modified, work to the benefit of both management and shareholders. Paying for exceptional performance is both necessary and desirable.

Luckily, Mr. Biglari has already provided a better template for the board to consider that employs both invested capital and a higher hurdle rate. As chairman and CEO of Western Sizzlin Corp., Mr. Biglari, then a majority owner, designed the following performance bonus structure for Robert Moore, CEO of Western Sizzlin Franchise Corp.:

“Such bonus shall be equal to twenty percent (20%) of Cash Flows in excess of $2.3 million annually as adjusted by a charge of 20% of any incremental reinvestment of capital during each year (“Bonus Compensation”).”

That system made it much more difficult to reap excessive compensation from shareholders. Of course, now that he’s in charge, he wants the bar set lower.
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Shane A. Parrish
Noise Free Investments
Farmington, Ct

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