Thursday, August 06, 2015

When CEO Outbursts about Minimum Wage Are Just Not Cricket

Some estimates state that in 1960, the average CEO earned 40 times as much as the average worker. Let’s keep that ratio in mind given Dunkin’ Brands’ CEO Nigel Travis recent outburst about the $15/hour minimum wage campaign.

According to glassdoor, the average hourly rate for a Dunkin’ Donuts employee is $8. Add to that a cash bonus of around $50 and tips worth some $2,000 a year, the crew members earn about $20,000 annually from their job at Dunkin’. I am assuming that these numbers are the same for Dunkin’ Donuts’ other brand Baskin Robbins. The $15/hour minimum wage gaining momentum translates into $35,000 a year if we are generous and assume tips and a cash bonus.

On the other hand, Dunkin’ Brands’ CEO Nigel Travis made $10.2 million in 2014, up at a CAGR of 73% since 2011. The increase was largely driven by timed equity payouts, usually a performance based compensation to make sure CEOs have an incentive to stick around. The $10.2 million is about $585 for each and every Dunkin’ and Baskin Robbins shop on the globe.

The entire $10.2 million package was 510 times higher than what a Dunkin’ crew member takes home. And while Mr. Travis’ compensation increased quite nicely, the minimum wage remained flat. To put this into perspective, if a Dunkin’ crew member had started at the average $8/hour in 2011 and his rate had increased at the same rate as Mr. Travis’, the crew member would have made $71/hour in 2014. That is still significantly below Mr. Travis’ hourly rate of more than $5,000. Of course, as CEO, he works more than 40 hours a week, but even assuming an 80-hour week, his hourly rate would still be a respectable $2,500.

There is nothing wrong about making $10.2 million if performance justifies it. So, let’s take a look at company revenues, bottom line share price and franchisee performance. Dunkin’ Brands’ consolidated revenues grew at a CAGR of 6% between the 2011 to 2014. Not bad, but way below the 73% CAGR of Mr. Travis’ annual package. Getting closer to the bottom line, we may be on to something. Dunkin’s net income before taxes increased at a CAGR of 56% over the reviewed period. Clearly impressive but still below Mr. Travis’ 73%. The average annual closing price also increased at a respectable CAGR of 20%, even little faster than the S&P 500. However, less than a third the rate of the rise in the CEO’s package.

Less than 1% of all Dunkin’ and Baskin Robbins shops worldwide are company owned. As a result, over 75% of the company’s money is generated by franchisees in form of royalties, franchise fees and rent payments. It would be fair to say that at least 75% of Mr. Travis’ package is driven by Dunkin’ Donuts and Baskin Robbins franchisees.

How then have they faired? Same store sales for U.S. Dunkin’s stores increased at an average of less than 4% each year between 2011 and 2014. Baskin Robbins franchisees in the United States achieved an even slower SSS growth at an annual average of 2.5%. For international SSS, Dunkin’ Brands only provides figures for the years 2012 to 2014 and things look less impressive for non-U.S. shops. International Dunkin’s SSS decreased at an average 0.1% each year while Baskin Robbins locations did better at an annual average increase of 1.2%.

In summary, the increase in Mr. Travis’ package between 2011 and 2014 widely surpasses all other measures evaluated here. The best performing metric for the reviewed period is the company’s net income before taxes. On the other hand, franchisee store sales showed the slowest growth. Cynics might say that Mr. Travis’ compensation is the least driven by the performance of his company’s strongest assets.


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