Sunday, May 2, 2010

More reflections on the proposed compensation agreement for Sardar Biglari of Biglari Holdings

I dug out this old compensation agreement from 2009 --- this is the bonus agreement Sardar Biglari (now Chairman and CEO of Biglari Holdings) worked out with Bob Moore, the then CEO of Western Sizzlin Franchaise Corporation, when Sardar was the CEO of Western Sizzlin.

According to that agreement:
Bonus Compensation. While Employee is actively employed under this Agreement, and in addition to Employee’s Base Salary as set forth above, Employee is eligible to receive an annual performance-based bonus. Such bonus shall be equal to twenty percent (20%) of Cash Flows in excess of $ 2.3 million annually as adjusted by a charge of 20% of any incremental reinvestment of capital during each year (“Bonus Compensation”). The charge for reinvestment of capital shall be applied annually year over year but pro rated based upon the month in which the invested capital is contributed by the Company. For purposes hereof, “Cash Flows” shall mean the Company’s earnings before interest, taxes, depreciation and amortization (“EBITDA”), less capital expenditures ...
If you assume retained earnings of 100% this is a similar to Sardar's recent attempt at a compensation agreement. Except, the hurdle rate for Moore was 20% and he only received 20% of the future cash flows. For Biglari the hurdle is barley above the 10 Year T-Bill at 5% and he wants 25% of the cash flows. Why the double standard?

Several (former?) Biglari supporters have emailed me to tell me how disgusted they are with this proposed arrangement. I think most of them feel like a someone who just found out their business partner was a fraud.

In one stroke of the pen Sardar Biglari has simultaneously made Richard Dunning, the inept CEO of Fremont Michigan Insuracorp, appear underpaid and distanced himself from his most loyal followers. Regardless of his capital allocation skills, gone are the days when he's compared to the man he's clearly trying to emulate.