Domino's Pizza prides itself on its pace of growth. It's a central organisation controlling more than 100 self-employed businesses. Each time these franchisees open a new store, they pay Domino's a joining fee. They act like a buffer, reducing the risk for Domino's. Domino's provides the brand, the marketing and the equipment - but the franchisees pay for it; Domino's provides centrally-produced dough; the franchisees hire the people, make the pizzas and deliver them. And Domino's then gets royalties on the sales. The strategy is to increase sales per store and to open more stores.
So how should Domino's pay its CEO?
In 2012, then CEO Lance Batchelor was paid a salary of £438,000 plus pension and benefits and a bonus based on a formula linked to a demanding profits target. Profits that year grew by 14 per cent; and his bonus was £332,000. But that's not all: in both 2011 and 2012, he was granted an option to buy a million Domino's shares at near enough £4 each. And it's this variable pay that gives such an insight into Domino's.
Directors are sometimes accused of running companies for themselves. But this sort of pay structure aligns their interests with those of their shareholders, so what's wrong with that?
Simply this: it's too highly geared. Pay is geared to the share price and the share price is geared to expected earnings. If the share price goes up by just 11 per cent between 2011 and mid-2014, Lance Batchelor's option will be worth the same as his 2012 salary. If the share price goes up by a third, it will be worth £1.3m or triple his salary. (True, there's a threshold that actual earnings have to cross for the option to trigger, but this had been passed in 2012.)
But if growth falters, this works in reverse: earnings slow, expectations fall, the share price slides and the CEO could end up with a small bonus and worthless options. This is where behaviour gets interesting. A CEO's best game plan is to keep talking up growth (which Domino's has been doing). There's also a temptation (seen elsewhere) to take short-term measures to maintain a façade at the expense of long-term profits.
Or the CEO could simply jump ship. And that's exactly what Lance Batchelor has done. He's off to head up Saga by all accounts. According to Domino's annual report, resignations cancel share plans, so it looks like he's lost his options. Had he hung on for a few months more - and if the share price was £5.25, roughly the price when he resigned - his 2011 option could have netted him £1.4m. So okay, money's not everything, Saga's a bigger company and it's a career move, but the share price has been dwindling and his resignation is hardly a vote of confidence in Domino's future.
For Domino's has itself become a bit of a saga.
Realising that the more they grew in the UK, the harder it becomes to grow more, Domino's expanded into Ireland, Germany and Switzerland. But it's tough going - in July 2013, losses in Germany forced a profit warning.
Within a few weeks, two non-executive directors (the chairman and Nigel Wray, their major long-term investor) had sold most of their Domino's shares - another clue that the share price had peaked (and endorsing Investor Chronicle's 'sell' recommendation from earlier in the year).
Three months later, Domino's only two executive directors said they'd be leaving - first the chief financial officer and then Lance Batchelor. These are the two most important roles in the company and no doubt they're serving out their notice period diligently, but their combined departure can't avoid veiling Domino's with uncertainty. As Nigel Wray once told the Independent when asked what he looks for when he invests: "The bloke. Whatever the idea, whatever the business, the wrong guy will still ruin it." The qualities of senior executives - and how they are paid - can make all the difference.
Whichever way you look at it, Domino's is entering a new phase, one of slower growth and cash generation. As companies mature and adapt, they need executives with different qualities to manage them. They also need a more flexible pay structure extended to all senior executives to encourage long-term sustainability. In mature, lower growth companies, performance related pay is often based on a number of factors, not just profits. Parts of large cash bonuses are deferred - that way, companies get some of their money back when someone resigns. And awards of shares (or nil-cost options - where it doesn't cost anything to exercise them) are more common than market-based options because they're less volatile and so still worth something even if the share price falls.
Any new pay structure would need to be put to shareholders, and Domino's next annual meeting is due in March. It could tell us a lot about where the company sees itself going in the future.
