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Biglari Holdings Inc. Message Board

  • dahdumbo dahdumbo May 6, 2010 12:42 PM Flag

    30 million hurdle

    What big Larry is attempting to do is not totally offensive. Here's why:

    If you look through the numbers, sns is like a long term savings account that pays a fixed 10% interest rate without the ability to reinvest in the same account at the same rate. The restaurants are in a sort of runoff for lack of a better term.

    However, there remains the management of the interest the savings account throws off. In sns's case that's the reinvestment of the retained earnings and it's better to think of it annually as an average dollar amount than a percent of equity or book value. That amount is about 30 million. In our savings account example that would equate to a 300 million savings account paying 30 million simple interest per year.

    Given the above, what big Larry should be judged on is what he does with the retained earnings. In that case we might be willing to offer him a hurdle on that portion of the capital with an equivalent to a long term bond, say 5%, and 25% of profits above said hurdle. But, this is a hurdle that is distinguished from and in addition to the the 30 million dollar base hurdle. Again, that 30 million dollar amount is the basic runoff of the underlying restaurant operations. It's an approximate amount and someone more technical than I could calculate a more representative number.

    To summarize: we have a long term savings account paying interest of 30 million per year. We negotiate with big Larry to reinvest this interest on our behalf with a 5% hurdle and 25% of profits. But this compensation is only applied to the reinvested interest and not our base cash flow of 30 million.

    This is a more proper form. For those trying to use concepts of compound interest as it applies to retained earnings, that is improper, because the restaurant operations act more like a simple savings account with no ability to reinvest interest.

    I believe the above is an elegant solution to the shareholder issues with the recent comp proposal. I can see no good reason why Big Larry, if he believes in being compensated for his value add, would have a problem with that.

    Again, some minor adjustments would have to be made, like accounting for the uninvested cash on the books etc. I do look forward to any and all comments on this post.

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    • Here's my reaction:

      Who says the $30 million can't be reinvested in the restaurants? Reread my post about the BV growth of SNS over the last 9-10 years. It averaged over 10% annual compound (if I recall correctly) and that included the reinvestment of the earnings.

      To claim no reinvestment is just plain silly. Let's say BV is $300 million. In 20 years, the restaurants will be earning a lot more than $30 million simply due to inflation. If a hamburger costs $6 then (instead of $3 now), earnings should also double.

      Second, have we gotten to the point that a CEO has to be compensated extra for simply doing his job? It's like we should applaud and reward Biglari for not wasting shareholder's money. That's absurd....not wasting money is simply part of the job.

      Are we going to get to a point where the CEO goes to the Board and says, "I have this wonderful reinvestment opportunity, but I am not going to pursue it unless I get 25% of the profits from it. If you don't agree, then I'll just let the cash sit on the balance sheet."

      Finally, let me give you an example of what you are doing. Imagine Biglari, who earns $900k, went to the Board and said, "I want a billion dollar salary". Everyone would be up in arms.

      Sooner of later though, people would start saying, "Well, maybe Biglari deserves something....let's give him $500 million. Compared to one billion, that's a bargain."

      It's an old psychological trick. Compared to 1 billion, $500 million seems reasonable. However, if he would have asked for $500 million right away, there's no way he would have received it.

      That's the reason why the "suggested retail price" is always so absurdly high. It's called anchoring. You get that number in your head, and anything lower seems better.

      • 2 Replies to art_vandelay_7
      • Yes Art, I am anchoring.

        It is true that I do believe that we could find someone who is competent and trustworthy to run the underlying business for less than 500 thousand per year. In fact, I think we could find someone who meets that criteria for much less.

        Guilty as charged. But let me amend my proposal above. Reduce big Larry's base salary to 200k per year with a bonus to be paid of 20% of profits above a 30 million (with adjustments) and a 5% hurdle.

        My preference would be to do away with the 5% hurdle and instead give 15% of profits. I have my reasoning and it assumes the manager isn't someone who is predisposed to being wantonly lazy.

        Again, good catch on my anchoring. However, I don't necessarily disagree with the premise of it all, and believe that the details need to be hashed out in a give and take with shareholders. My point above was more to distinguish the underlying operations from the retained earnings, but as you might suggest, isn't every company like that, and I wouldn't disagree with you at all, but very few managers today are appropriately compensated on how they reallocate retained earnings. And as Buffett might suggest that's going to be 50% of the average business after 10 years.

      • Art:

        The only way Biglari is worth $500,000,000 is if you agree that Howard Stern was worth $500,000,000 to Sirius. And Stern's $500,000,000 was to be paid over five years.

        Maybe, the board could give Biglari $500,000,000 in exchange for his promise not to demand $1,000,000,000.

        Truly corporate compensation is insane. I thought that the financial crisis might cause executive pay to reach a more logical level but I appear to have been wrong. Personally, I have decided to only invest in companies with more reasonable compensation plans. Therefore, most of my money is in BRKB and a few other small cap companies. There are not many qualifying candidates if you insist on reasonable compensation and BH does not meet the criteria.

 
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