Chipotle’s bonus program rewards a metric that 73% of Fortune 500 companies now use to set executive compensation

Earlier this month, I reported there’s some indication that annual bonuses for CEOs and CFOs in 2022 weren’t as robust compared to prior years. But a company’s financial performance isn’t the only indicator of whether an executive’s bonus or compensation increases. Progress in environmental, social, and governance goals is becoming a major factor.

A recent report released by the Conference Board found the vast majority of S&P 500 companies are now linking executive compensation to some form of ESG performance—an increase from 66% in 2020 to 73% in 2021. Take for instance Chipotle Mexican Grill. The fast-casual restaurant chain first announced in 2021 that up to 10% of executives’ annual incentives will be tied to their progress toward achieving company ESG goals. In 2022, Chipotle increased that to 15% and will keep the bar there this year. 

“The current compensation plan ensures leaders continue to set the tone for Chipotle’s nearly 100,000 employees,” Laurie Schalow, chief corporate affairs officer at Chipotle, told me. 

Chipotle’s ESG goals for 2023 that are tied to executive compensation include purchasing at least 37.5 million pounds of local produce, up from 36.4 million pounds in 2022; improving the retention of its diverse U.S.-based restaurant support center and field operations employees; and beginning composting programs in at least 23% more restaurants. Making these goals a priority and holding the leadership team accountable “intrinsically minimizes our impact while accelerating our growth,” Schalow says.

So how does Chipotle’s bonus program work? There’s a “performance-driven compensation philosophy for executives,” she says. “As an employee’s responsibilities and ability to affect our financial results increases, base salary becomes a smaller component of his or her total compensation,” she explains. “Our Annual Incentive Plan is our annual cash incentive program for certain bonus-eligible employees, including our executive officers, which is based on the achievement of three factors: a company performance factor,  an individual performance factor, and an ESG factor.”

How did the company do with some of the 2022 targets? Chipotle met its goal of purchasing more than 57 million pounds of organic, transitional, or locally grown ingredients, according to the company. Chipotle set out to increase diversity above its 60% rate for its pipeline of candidates for promotions. It achieved a 63.6% rate. Ninety percent of all restaurant management roles were internal promotions including 100% of U.S. regional VP roles, 81% of team directors, and 74% of field leader positions, according to the company. Both hourly and salary turnover rates for employees hit a two-year low in December 2022, Schalow says.  

Will tying executive compensation to ESG goals work for every organization? The Conference Board’s report suggests that companies should consider using ESG operating goals for one to two years before including them in compensation. This practice would allow time to determine if those goals are truly relevant for the business. 

The report cautions that companies will need to go beyond simply “following the trend.” Companies will need to explain to investors and stakeholders “why including or adjusting ESG goals in compensation programs makes business sense and will ‘move the needle’ on the firm’s performance and impact,” according to the report. 

With proxy season on the horizon, executive compensation and ESG are certainly topics that will be on the docket.

Sheryl Estrada
sheryl.estrada@fortune.com

Big deal

PwC’s 2023 Trust Survey finds that 92% of business executives, 92% of consumers, and 94% of employees agree that organizations have a responsibility to build trust. Almost all (91%) of business executives agree that their ability to build and maintain trust improves the bottom line. The report also highlights opportunities that executives can take to boost employee trust. For example, PwC asked business executives and employees whether or not company leadership gives appropriate attention to earning trust in the business. Forty-five percent of business executives say they do. Meanwhile, just one-third (34%) of employees agree. PwC explains how businesses can get smarter at building trust to create value. The findings are based on a survey of 500 business executives, around 2,000 employees, and 2,500 consumers in the U.S.

Going deeper

“Leaders Need to Get Comfortable Collaborating on Strategy,” a report in Harvard Business Review, explains why the “industrial-age way” of developing strategy needs an upgrade. A company’s business strategy throughout most of the 20th century was usually developed by the CEO and direct reports. “It’s no longer feasible to rely on this industrial-age way of developing strategy,” writes Graham Kenny, CEO of Strategic Factors. “The internet age has produced highly informed, extremely well-connected user communities that have ever-stronger opinions about what businesses should do. Small wonder that senior executives at Proctor & Gamble have described the old top-down approach to innovation and strategy design as a ‘broken model.'”

Leaderboard

Erica Gessert was named CFO at Upwork Inc. (Nasdaq: UPWK), an online marketplace that matches freelancers with employers, effective April 25. Gessert joins from PayPal (Nasdaq: PYPL), where she held several senior leadership roles since 2015, most recently including chief transformation officer reporting to the CEO and senior vice president of finance and analytics. Before PayPal, from 2009 to 2014, Gessert served in a variety of roles for Sprint Corporation, including VP of finance for Sprint Postpaid marketing and CFO for the Sprint Prepaid business unit, as well as director of investor relations. She previously served as head of investor relations for Virgin Mobile USA from 2007 to 2009.

Kenny Cheung was named CFO art Sysco Corporation (NYSE: SYY), a global food service distribution company, effective April 17. Neil Russell, who has served as Interim CFO since Jan. 6, 2023, has been appointed to the newly created position of chief administrative officer. Cheung most recently served as EVP and CFO at The Hertz Corporation, where he led the company’s global finance organization. Previously, Cheung also managed procurement and global franchise operations. Before he was appointed CFO, Cheung served as EVP and chief operational finance and restructuring officer and in several finance leadership roles, including SVP of global financial planning and analysis and CFO for Hertz North America. Before joining Hertz in 2018, he spent over a decade at Nielsen Holdings PLC, most recently as global chief audit executive, and before that, as a regional chief operating officer and regional CFO. 

Overheard

“Our baseline expectation is that reduced credit availability will prove to be a headwind that helps the Fed keep growth below potential…not a hurricane that pushes the economy into recession and forces the Fed to ease aggressively.”

—Jan Hatzius, Goldman Sachs chief economist and head of global investment research wrote in a Tuesday note. Hatzius believes that the recent issue of the few failed banks resulting in tighter lending standards, which can lead to a credit crunch that makes capital hard to come by for consumers and businesses, may help the Federal Reserve cool the economy and fight inflation, Fortune reported.

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