Executive Compensation: Methods and Analysis for Quick Service Restaurants Industry

This assignment analyzes the remuneration methods for executives in the quick service restaurants industry. It includes a literature review and a review of the remuneration policies of Dominos and Yum Brands. The analysis is based on factors such as performance, equity, and geographical location.

Compensation
Assignment

1
By student name
Professor
University
Date: 4th Sep, 2018.
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Executive Summary
The following assignment deals with measurement of the remuneration that is paid off to the
shareholders and other executive members of the company. There are various ways in which companies
are analyzing the remuneration that is paid off and the aim of this assignment is selecting the best
method by which such remuneration should be paid off. Various research article with respect to the
given topics have been taken into consideration, also two companies have been selected that belong to
the same industry and their overall remuneration policy have been discussed. There are various
components of the remuneration that is paid of by the company and many factors are responsible for
that, a lot depends on the performance of the company and that is reflected from the share price of the
company that is evident from the analysis of the company stocks.In this case the quick service
restaurants business has been taken as the industry and the overall methods by which they pay off their
remuneration and what would be the best way by which they can give the best results to the
shareholders that would be good in short term and long term has been discussed and presented below.
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Contents
Introduction.................................................................................................................................................4
Literature Review........................................................................................................................................6
Company Review.........................................................................................................................................8
Conclusion.................................................................................................................................................10
References.................................................................................................................................................10
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Introduction
In this assignment the overall methods by which a company can decide what is the
remuneration by which they need to be paid off is discussed. Every public listed company needs to have
a remuneration committee and that decides the overall remuneration structure that needs to be paid
off. Remuneration forms one of the major part of the financials of the company and the shareholders
depends on that to determine whether they should invest in the company or not. Payment of
remuneration is also important for the shareholders and the executives that are working for the
company. On scrutiny we can see that are various factors based on which the companies and their
remuneration committee decides what would the remuneration be. There are many research articles
that can help in throwing light on the matter more.
Literature Review
There are several methods by which firms can calculate the overall payment that they are
planning to make to their top management and these can range from companies to companies. Some of
these methods are stated below.
As per Hamid Mehran, the executive compensation is one of the major factors that motivates
managers to increase their firm performance. Most of these compensations are calculated based on the
overall percentage of equity and in most company’s equity based compensation is used as one of the
most driving factors than all other means. In case any firm has more outside directors they resort to this
way, firms in which the higher percentage of shares are held by insiders they aim to use this method.
Basically, the aim of any organization is to resort to methods that would help in increase in the
shareholders wealth. These are the people who are investing in the company. The overall net profit that
is attributable to the shareholders of the company is divided with the percentage of the shares held and
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based on that the compensation is calculated. Thus, companies that have more outside directors they
resort to this method because their aim is to increase their overall payable in terms of return to
shareholders, because that would motivate investors to keep investing in the company.
The same has been stated by Timothy Hinkin, that executives that are working in externally
controlled firms receives more for the performance and less for the overall scale of operation than in
firms that do not have any dominant shareholders. This means that they have the right to align the
performance of the firm with the compensation that the CEO receives. The data of 71 very large
manufacturers have been taken to make a recommendation to this (mejia, et al., 2017).
As per Antle and Smith, there are various issues that measurement of executive compensation
addresses. First is the overall effect that the compensation have on the measurement of the various
accounting alternatives that the company is having and how changes in the accounting regulation can
affect their overall actual selection of the accounting techniques for the company. Secondly whether the
compensation would affect the managers to make a change in their overall investment and production
decisions. The third is the impact that the decision has on the terms of executive contracts on their
decisions. Thus, we see that the main effect is how the managers would change their contribution to the
firm if their contribution by the firm in terms of compensation changes. So we can say a lot is dependent
on the company and its policies that might be the driving force based on which they can calculate the
relevant compensation they are paying off (Antle & Smith, 1985).
As per Coughlan and Schmidt, the internal control measures that are relevant in the internal
department of the company can also be a driving force that can help them in calculation of the
executive compensation and can play a major role in this. It has been stated that both the compensation
changes and management changes are the methods that can be used to control the top management of
the company. The change in these methods are related to the change in the overall stock performance
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of the company and the board of the firm will create managerial incentives that would be consistent
with the overall performance of the board (Coughlan & Schmidt, 1985). This can be done by setting the
compensation and making changes to the overall management policies that can help in benefiting the
shareholders of the company. Thus, based on the overall research it can be said that the executive
compensation is linked with the performance of the firm directly or indirectly and there are several
factors that needs to be taken into consideration while calculating the payables for the company
(Arnott, et al., 2017). It is a driving force for the shareholders for which they are contributing to the
company and thus the aim should be to link their contribution with the overall remuneration that they
are paid off. In case they do not get satisfactory compensation, they won’t invest in the company and
this would hamper the growth and expansion of the company.
To understand the topic better two companies from the same industry have been taken and
their overall compensation structure has been studied below.
Company Review
The two companies that have been selected are Dominos and the Yum brand that operates
companies like Pizza Hut, Taco Bell and KFC. These are top quick serving restaurants in the country and
have millions of revenues.
Domino’s is one of the largest chain of fast food. The company specializes in Pizza and there are
a variety of other items that it sells through its franchise modeled business. The overall corporate goals
of the company as per their annual report is to develop strong corporate values and follow the aims of
corporate governance. The company also aims to develop a strong understanding in taste of people and
carter to it. They want to be number one pizza company in the world and promote strong ethical values
in their code of conduct (Belton, 2017). The company also aims to provide better return to their
shareholders in the coming years and are also planning to expand their operations more. The overall aim
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is to promote women participation in the trade and they promote woman equality in their stores also.
The Company is a multinational company and thus have a Group CEO who heads the operation and
there are many shareholders who have invested their funds in the company (Choy, 2018).
The second company is the Yum Brand. It is an American Fast Food company that has its
operation in almost every company of the world. The company operates brand like KFC, Pizza Hut, Taco
Bells etc. It is the largest fast food company in terms of system units. It started independent operations
20 years back. As per the annual report of the company, the CEO aims to improve in four key growth
responsibilities and that includes, distinctive easy and relevant brand (Das, 2017). The overall franchise
capacity should improve. There should be a bold restaurant development for the company and the
culture of the company should be leveraged and that would help in fueling the performance of the
brands and success of the franchise. The company gives utmost importance to the overall brand value
that they have built over the year and that is promoted by the company.
The remuneration policy of the two companies have been reviewed now. In case of dominos brand, a
remuneration committee has been set up and the aim of this committee is to select, appoint and
remuneration practices of the company. The remuneration Committee will make recommendation in
relation to the framework of the remuneration for the directors and it was approved by the security
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holders allocated to the directors, the remuneration package needs to be awarded to the senior
executive and other employee. For the senior executive and other employees, the equity-based plans
need to be followed. For the top management the overall superannuation arrangement is done. It is also
made sure that there is no gender biasness with respect to the overall remuneration that is paid off by
the company (Werner, 2017). The company is a geographically diverse company and the total
remuneration that is paid off are divided into three parts that includes fixed compensation that is
dependent on various factors like the overall market rate and the accountability of the person, the
geographical location and overall experience (Jefferson, 2017). The other parts include short term
incentives that are paid by the company which includes financial and individual performance targets
relevant to the specific position. The long-term incentives are linked to EPS growth, growth of the
EBITDA and depends whether the role is having group or segment responsibility for the company.
Remuneration shall be paid off in various methods which includes base remuneration, equity in options,
all equity is held subject to service and performance for a minimum of 3 years from grant date. The cash
payment is paid based on the review of the audited financial statements of the company. The strategic
intent for the payment of the remuneration is also taken into considered for the company. An extract
from the annual report of the company has been attached below:
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In case of Yum, the compensation payment includes the base salary, the annual performance-
based cash bonuses and long-term equity performance-based incentives. The compensation highlights
include the target compensation that has been setup by the CEO of the company. It will include an
equity mix of long term incentive awards at 50% of the SAR and 50% of the PSU (Grenier, 2017). The
Committee certified that our 2014 PSU awards under our Performance Share Plan paid out at 71% of
target in 2017 based on the Company’s Total Shareholder Return (“TSR”) for the 2014-2016. The overall
remuneration that is paid off is paid based on the overall performance of the company and
approximately 90% of the CEO target compensation is “at-risk” that would be based on the overall
company results. Thus, we see that the performance is a major factor in determining the overall
payment that would be paid off by the company. The target mix of the CEO has been included below:
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The compensation that is paid off to the CEO is related to the performance of the company. There has
been target set off based on which the performance of the company has been set off. In 2015, CEO’s
actual total direct compensation was below the target and CEO’s actual total direct compensation for
2016 and 2017 which will show that the company is performing better (Kim, et al., 2017).
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The various elements of the components of the executive compensation programs are: base
salary, the objective with this is to retain the high caliber talent based on their experience. The second
would include annual-performance based cash bonuses, long term equity based performance incentives
and retirement and additional benefits are also paid off by the company. The performance based bonus
depends on many things like that target bonus percentage, team performance and individual
performance of the company (Jefferson, 2017). The overall performance of the team is very important;
thus, it seems that the performance of the company is very important and that forms a very important
part for determining the overall remuneration that needs to be paid off by the remuneration committee
of the company. An extract from the annual report of the company is stated below that highlights the
remuneration that is paid off:
Growth Profitability and Financial Ratios for Domino's Pizza Inc
Financials
2014-
12
2015-
12
2016-
12
2017-
12
Revenue USD Mil 1,994 2,217 2,473 2,788
Gross Margin % 29.8 30.8 31 31.1
Operating Income USD Mil 345 405 454 521
Operating Margin % 17.3 18.3 18.4 18.7
Net Income USD Mil 163 193 215 278
Earnings Per Share USD 2.86 3.47 4.3 5.83
Dividends USD 1 1.24 1.52 1.84
Payout Ratio % * 34.1 37.5 36.3 33.6
Shares Mil 57 56 50 48
Book Value Per Share * USD -23.07 -22.98 -40.17 -64.46
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Based on the above diagram we can see that the overall pricing policies of the company has
grew over the year and we show that from last three years the share prices of the company and the
overall investment has been consistent and it can also be seen that based on that the dividend that is
paid off by the company has increased. But what we see is that the overall pay-out ratio for the
company has reduced from 2016 to 2017, which shows that the company is not paying off as much they
were doing from the prior years and thus that in turns is affecting the performance of the company and
the payment that is made to the shareholders of the company (Erik & Jan, 2017). So compensation is
linked to the performance of the company and thus we see that compensation is linked a lot based on
external factors that affects the overall prices of the shares in the market. When we study the
remuneration policy of the company we see that there are both cash components and fixed
remuneration and also long term and short-term incentives that are based on the performance of the
shares of the company in the market (Farmer, 2018). The overall revenue of the company has also
increased since prior years and this shows that the company is performing well and thus shareholders of
the company are getting good returns for that which is evident from the dividend that are given.
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The above chart shows the movement of the prices of the shares of the company and thus it can
be seen that it has always been increasing from prior years and thus that shows that company is doing
well and thus the fair amount of compensation that is paid off to the top executives who are working for
the company and their compensation is also a reflection of the share performance of the company
(Sithole, et al., 2017).
In case of Yum, the following analysis has been made based on the overall movement of the shares and
the market price of the stocks and the payment of dividend.
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Based on the above figure the overall movement of the share prices has been consistent since
the prior years, however there have a great rise in last one two years and that is reflected from the
steepness of the slope. It also shows that the company has been doing incredibly well from the view
point of the market and the increased revenue is also an indication about the same. It also reflects the
position that more and more shareholders are benefiting from the increment in the share price and are
awarded with great compensation for the overall contributions that they are making (Trieu, 2017).
From the view point of the dividend pay-out previously the company is paying more dividend in
comparison to the industry in which it is operating and thus more and more shareholders are investing
in the company. The five-year average of the overall dividend that is paid by the company is also huge
but the pay-out ratio is less in comparison to the industry and this signifies that even if the company is
paying off more dividend the payout is less because the overall revenue of the company is more and
that reflects their optimum remuneration policy. The share based incentives are also a part of the
executive compensation that is paid off (Alexander, 2016).
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Based on the overall analysis of the share movemement and the prices and the payment of dividends it
can be said that both the companies have been doing incredibly well , and it makes it very clear that
compensation is related to the performance of the company in the market. If the company is perofrming
well, the share prices will increase and the shareholders will in return get good return for their
shareholders. In terms of revenue Yum brand has more revenue given that it is a brand that operates so
many other companies but Dominos with its stand alone valuation is one of the largest food selling
business in the world and there is no comparison between the two, both are top players of the industry.
The only point that can be compared is the basis on which they are paying of their variable component
which depends a lot on the top management and the remuneration committee that has been set up for
this purpose (Grenier, 2017). It can also be seen that the dividend pay out for the company is better in
case of Yum in comparison to dominoes and this may be due to external factors like growth and overall
future expansion plans that the company is having. In terms of share prices , both the companies have
seen great amount of success and that is evident from their development on part of the companies and
the share prices and their movement indicates precisely whether and thus the investor needs to study
that when they want to invest in the company or not.
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Conclusion
Based on the overall analysis it can be seen that the companies need to have proper remuneration
structure based on which they need to define how much they would pay off their shareholders who are
highly dependant on them. There are various components of the remuneration that is paid of by the
company and many factors are responsible for that, a lot depends on the performance of the company
and that is reflected from the share price of the company that is evident from the analysis of the
company stocks. Compensation is the most motivating factor that motivates executives with regards to
the contribution to the firm that they are making. We see that better the firm performs the more
compensation is being paid off. There are many factors apart from the fixed compensation that is paid
off, as there are variable factors also on which the short and long term incentives of the company
depends. These variable payouts forms a major portion of the entire remuneration that is paid off to the
executives and that in turn is related to the performance of the company. Thus based on the overall
analysis it can be seen that , the best method for payment of shareholder remuneration is the equity
method which is dependant on the percentage of the shares that the company is having. The short term
and long term best methods for calculation of the remuneration of the company is to see how well the
company is performing and what are the overall trends in the market with respect to the possible
conditions that are exsisiting and also how the compensation is derived based on these factors. So we
see that compensation calculation requires a lot of analysis and the shareholders should study that
before investing in the shares of the compensation.
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