Stock Market and Banking & Finance and Investing

SKARBECK: Biglari's pay plan is raising eyebrows

October 16, 2010

Ken Skarbeck InvestingLocal observers have taken an interest in the proposed compensation plan for the CEO of Biglari Holdings, or BH, the company formerly known as Indianapolis-based Steak n Shake.

Eschewing stock options and restricted stock as imperfect forms of pay for company performance, the plan compensates the CEO based on a formula calculated on annual book value growth (other BH executives still earn options and restricted stock).

The proxy statement proposes for shareholder vote an incentive pay formula where the BH CEO earns 25 percent of company profits in excess of a 6-percent “hurdle rate” in book value growth—similar to the fee schemes used by many hedge funds. BH recently revised the formula to cap the maximum incentive payment to the CEO in any one year at $10 million. To state the obvious, BH has essentially morphed into a publicly traded hedge fund. Of this, shareholders should be keenly aware.

The proxy filing goes through painstaking detail in comparing Sardar Biglari’s pay to a peer group of executives. The tables demonstrate how underpaid CEO Biglari is relative to the 18 other CEOs in his peer group. The data also trots out the superior performance of BH stock in the 23 months after Biglari gained control of the company relative to the peer group.

To the contrary, a cynic on executive compensation might look at the tables in the BH proxy and conclude this isn’t a case of Biglari’s being underpaid, but that of other executives in the peer group being grossly overpaid. In addition, two years is a short period to measure either CEO or stock performance.

Over the past five years (which includes three years as Steak n Shake before Biglari’s coup), performance of the stock shows the stock price is essentially unchanged, mirroring the overall market. So while you might give Biglari marks for his timing by grabbing Steak n Shake at the market nadir, the stock has essentially “reverted to the mean,” just like many other stocks did during this volatile market period.

Unfortunately, if BH thought it was breaking ground in the field of executive compensation with this plan, it has fallen short. There is still a “heads I win, tails I win” flavor to the plan, with little downside risk to the CEO if performance is poor.

However, provisions in the recently passed Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 might help level the field for shareholders. While the final rules have yet to be written, the act provides for repayment from any current or former executive officer of any incentive-based compensation paid during the three-year period preceding an accounting restatement.

For a company like BH, acquisition accounting is tricky and it is not unusual for restatements in years following business acquisitions. The BH proxy was likely written before the act was passed, but these new rules would provide BH shareholders—or any U.S. shareholder—a means of recouping executive payments that were based on inaccurate figures.

Last, the proxy laments the loss of potentially more lucrative earnings Mr. Biglari gave up in managing his investment partnership Lion Fund when it was recently purchased by BH. The details of this “related” transaction are sketchy and shareholders have never been provided with the performance track record nor the size of the Lion Fund. Yet, in the proxy, BH states that it expects investment management to be a critical business going forward.•

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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.

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