Biglari gets huge pay raise at SNS

[omagh]

Sanjeev,

 

Ummm...it depends on your view.  From a FCF view (OpEx-CapEx), Patrick kicked Sardar to the curb and at the end of the day, it's about the cash.

http://ca.finance.yahoo.com/q/cf?s=ostk

http://ca.finance.yahoo.com/q/cf?s=SNS

 

I'm impressed with Biglari's ability in the short term, but I do wonder about his ability longer term.  There is a leadership tactic which amounts to "rally around the flag"; this is effectively crisis leadership.  I see Biglari excelling here.  I do question his ability to provide the steady hand like Buffett and Watsa do who create large, loyal and effective teams full of tremendous talent.  Obviously it's unknowable how Biglari performs in this area until time passes.  WEST has churned through a CEO (Verney) under his tenure.  Does Robyn Mabe continue long-term as CFO/COO, for example?

 

Biglari may be a turnaround specialist, which is still a good thing where he identifies underperforming assets and tidies them up for resale.  I'm guessing that he's quick on his feet and an excellent negotiator.  All in all, Biglari's a good partner to have.

 

-O

 

No slight to Patrick, but Biglari in one quarter has made as much as OSTK's total earnings.  Two different businesses, and one was having a complete heart attack.  The turnaround at SNS has been incrediby impressive by anyone's standards.  The last company I saw turn around like this was ironically McDonalds under Jim Cantalupo.  Even the turnaround at Fairfax which was spectacular in itself, took a few years to get going.  Cheers!

[Parsad]

Hi Omagh,

 

Nice picture!  I just noticed it now.  In regards to the charts you show, they aren't comparable quarters.  Use these two:

 

OSTK:  http://finance.yahoo.com/q/cf?s=OSTK

SNS:  http://finance.yahoo.com/q/cf?s=SNS

 

And you can really only examine the last two quarters on each chart, and perhaps another half of the quarter previous, since that's when Biglari really took over.  It's no comparison, look at Biglari's numbers from operating cash flows and cash equivalents.

 

If you examine the same quarters for the income statement, it's equally impressive:

 

OSTK:  http://finance.yahoo.com/q/is?s=OSTK

SNS:  http://finance.yahoo.com/q/is?s=SNS

 

Look at the operating income/loss and the trend in Steak'n Shakes income statement.  Huge strides in operating profits and I would expect another significant jump this quarter with more efficiencies and increased revenues.

 

Don't get me wrong...I love both these guys.  I'm one of the biggest defenders of Wacky Patty as some idiots call him.  But the business model at OSTK is a tough one.  The areas where you can cut costs while not cutting revenue in an online business, are fewer than at a brick and mortar retail business. 

 

People who like Steakburgers at Steak'n Shake, are going to eat Steakburgers only at Steak'n Shake because of the taste and nostalgia.  But people who want something from Overstock, can likely find it at Amazon or even Ebay.  We've owned Overstock in the past solely because of Patrick.  We own plenty of Overstock debt at the moment.  But it is a tough business model.  Cheers!

[omagh]

Hi Sanjeev,

 

You're right...Yahoo is normally more reliable than this, but it skewed the SNS numbers by a year.  I even used the "Get Cashflow for: symbol" to do a comparison between the two sets of numbers, so I didn't check that the quarters aligned by year...sheesh!! Thanks for catching the error.  That's a beer for your tab! ;)

 

So, Patrick kicked FCF butt on the old SNS team -- not hard to do.  And after looking at the comparables, Biglari has done a tremendous job in righting the ship from a pretty sad negative operating income position.  And as well, he's been able to generate FCF to pay down debt at SNS which is strengthening the balance sheet quarter-by-quarter.

 

Cheers!

 

-O

Nice picture!  I just noticed it now.  In regards to the charts you show, they aren't comparable quarters. 

[Partner24]

a few posters have commented that comparisons to buffett are unfair, that every one is unique. true. that goes without saying. but frankly i think anyone who is compared to buffett as opposed to virtually any one else, whether it be jack welch, or (gasp!) ken lewis or carl icahn, should consider it an honor no matter how much they are bound to suffer by comparison. when people STOP comparing you to the best, that's when you know you've fallen from grace.

 

Cumming and Steinberg, Steven Markel and team, Prem Watsa and team, Brian Joffe and team...yes, you can compare them even if there is significant differences between all of them. But put Biglari in this "Hall of Fame" list?

 

It's Very, very, very too soon to do that!!! And if they still want to do this questionable exercice, then they will have to compare him and his salary and a 100 K and 600K kind of salaries, with decades of tremendous track records of wealth creation for their shareholders, fiduciary duty, integrity, frugality and loyalty.

[yudeng2004]

a few posters have commented that comparisons to buffett are unfair, that every one is unique. true. that goes without saying. but frankly i think anyone who is compared to buffett as opposed to virtually any one else, whether it be jack welch, or (gasp!) ken lewis or carl icahn, should consider it an honor no matter how much they are bound to suffer by comparison. when people STOP comparing you to the best, that's when you know you've fallen from grace.

 

link01, the problem first of all is that people began to compare Biglari to Warren and started to make links between the two. Actually, having studied Berkshire and Warren for years, to me, it's an insult to Warren. So, yes, they should take a look at their respective track record and personnality and then STOP comparing them.

 

Cumming and Steinberg, Steven Markel and team, Prem Watsa and team, Brian Joffe and team...yes, you can compare them even if there is significant differences between all of them. But put Biglari in this "Hall of Fame" list?

 

It's Very, very, very too soon to do that!!! And if they still want to do this questionable exercice, then they will have to compare him and his salary and a 100 K and 600K kind of salaries, with decades of tremendous track records of wealth creation for their shareholders, fiduciary duty, integrity, frugality and loyalty.

 

Well, this is very true, that it is way too early.  However, this is sort of how most people think - to project things, and compare things using their own perspectives.

 

This happens in every field - kobe is the next michael jordan, messi is the next maradona， obama has jfk charms blah blah blah...

 

I think that each person is unique, even if they themselves try their best to emulate certain figures. 

 

To me the only person who should be mentioned in the same breath as Buffet is Soros, and possibly James Simmons in another decade.

 

To me, Warren Buffet is

A+ in business sense

A+ in reading people/attracting talent

A in security analysis (his method is not bullet-proof, especially during crisis as we have seen)

B in macro economic sense

C in speculative/market timing sense (was better in his earlier career)

 

Soros is

A+ in speculative/market timing sense (This is not any less important than security analysis if your only concern is producing market-beating returns)

A+ in macro economic sense

B in security analysis (I would say he benefited from rogers here)

C in business sense (don't think he is interested to know that Coca Cola has no taste memory, for example)

C in reading people/attracting talent

 

There is one common trait they share - no INNATE DESIRE for material things (they don't want a good material life by nature, not by descipline)

 

There are more than one paths to glory - that's how I would look at it.

 

The key is do you have the right combination, or is willing to work to acquire the right combination of traits/skills. 

 

For example - good macroeconomic sense + good speculative/timing sense must co-exist.  Jim Rogers possesses the good macro economic sense, but his timing skills are worse than Soros, so he couldn't get his returns up into those top ranges.

 

If balgari can produce market beating returns and his pay is not outrageous, then it is totally fine.  Despite this particular act, the most important question is - does SNS itself have much intrinsic business value or do most of the value come from extreme discpline on the part of managers?

 

If inflation were to hit us, I rather own some junior gold producers than some generic restaruant.

[claphands22]

Looking forward to Sardar's rationality behind the pay raise.  So I'll I give him the benefit of the doubt till then...even though it gave me sticker shock.

 

To me the more interesting news was the repayment of the Prudential debt.  I believe this debt kept SNS from repurchasing shares. Hopefully we will see some repurchases in the near future. I also believe he wasn't going to pay of that debt until he was confident SNS no longer needed the Prudential debt buffer.  So things should be good if SNS payed off Prudential.

 

yudeng,

 

Nassim Taleb once said James Simmons and George Soros are the only two traders who don't have any uncertainty in their models.  Do you know why he said that?

 

 

 

 

[prevalou]

he is no Lampert. Zero compensation with a splendid turnaround at Kmart then Sears.

[claphands22]

 

There is one common trait they share - no INNATE DESIRE for material things (they don't want a good material life by nature, not by descipline)

 

 

Absolutely. The one thing you get from Buffett is, he likes the money but he loves what he does. Material things no longer add utility.

 

Malcolm Gladwell once had this great interview (which I can't find now) where he said "love" was one the most important parts of genius. He gave examples of Wayne Gretzky love for hokey and Gate's insane love for programming. 

 

One of the things that makes me wonder about Sardar is... Does he love the money? or does he love the business? 

[ragu]

To me the more interesting news was the repayment of the Prudential debt.  I believe this debt kept SNS from repurchasing shares. Hopefully we will see some repurchases in the near future.

 

claphands,

 

The restriction on cash dividends and repurchases arise from the terms on not just the Prudential debt but also the line of credit. Unless those terms are amended, Sardar's hands are still tied with respect to the repurchases.

 

Best,

Ragu

[link01]

Cumming and Steinberg, Steven Markel and team, Prem Watsa and team, Brian Joffe and team...yes, you can compare them even if there is significant differences between all of them. But put Biglari in this "Hall of Fame" list?

 

who put sardar in the hall of fame list? i didnt.

 

all i meant to suggest is that he shares nascent traits & qualities that could be described as "buffett-esque". obviously, any one who invests in west or sns at this early point is doing so on somewhat of a leap of faith, betting that he will prove himself to have not only many of the qualities we admire in web & some of the other guys you mentioned, but also the skill-set. and, yes, we might well be proven wrong as time unfolds...or right.

[Zorrofan]

Looking forward to Sardar's rationality behind the pay raise.  So I'll I give him the benefit of the doubt till then...even though it gave me sticker shock.

 

 

Perhaps a bonus instead of a salary increase would have been more appropriate?

 

cheers

Zorro

[claphands22]

 

claphands,

 

The restriction on cash dividends and repurchases arise from the terms on not just the Prudential debt but also the line of credit. Unless those terms are amended, Sardar's hands are still tied with respect to the repurchases.

 

Best,

Ragu

 

Thanks Ragu, didn't realize the restrictions were also on the line of credit.

[claphands22]

 

Perhaps a bonus instead of a salary increase would have been more appropriate?

 

cheers

Zorro

 

I think a bonus would make more sense because he did an excellent job keeping the business from sinking and that task seems completed. Yet, what I really wonder is, why does he think he deserves the high salary.

 

His answer to the $900,000 question will help me decide what kind of partner do I have going forward.  I think he will give an adequate explanation - everything I've read about the guy I like; but I'm definitely looking forward to to his answer.

[Junto]

 

Perhaps a bonus instead of a salary increase would have been more appropriate?

 

cheers

Zorro

 

I think a bonus would make more sense because he did an excellent job keeping the business from sinking and that task seems completed. Yet, what I really wonder is, why does he think he deserves the high salary.

 

His answer to the $900,000 question will help me decide what kind of partner do I have going forward.  I think he will give an adequate explanation - everything I've read about the guy I like; but I'm definitely looking forward to to his answer.

 

hey at least with a salary increase instead of a bonus the money doesn't go out day one. A bonus would have an immediate although not necessarily long lasting impact to the p & l. I like the direction SNS is heading and I am holding my position for a while longer.

[prevalou]

I don't believe Buffett has a reasonnable salary because he is very rich (look at the original partnership). I think it is because he is ethical.

You don't have to earn huge salaries to become wealthy. Lampert made his fortune thanks to his track record, not his salary.

[prevalou]

ethics has nothing to do with logic but a lot with a sense of proportion.

I noticed this in the 10 K:

" Early in fiscal year 2009, we suspended 401(k) matching contributions until profitability improves."

luckily for the workers, profitability is increasing...

[WideMoat]

 

Perhaps a bonus instead of a salary increase would have been more appropriate?

 

cheers

Zorro

 

Yes, a bonus would have been more appropriate.  Making it a salary ensures it as an entitlement in every future year, regardless of performance; that certainly reduces its ability to work as an incentive.

 

To show my hand, I find this action disconcerting.  Going forward, Sardar will benefit substantially more than other shareholders.  Let's say that his economic interest in SNS is 5% of outstanding shares, and SNS has 40 million in future annual FCF.  That puts his share of annual earnings at 2 million and his salary at 900,000.  He benefits nearly 50% more than other shareholders.

 

Granted, he's put forth more effort in the last year, but why not recognize that with an appropriate bonus and a properly incentivized contract?

 

 

[ragnarisapirate]

 

Perhaps a bonus instead of a salary increase would have been more appropriate?

 

cheers

Zorro

 

Yes, a bonus would have been more appropriate.  Making it a salary ensures it as an entitlement in every future year, regardless of performance; that certainly reduces its ability to work as an incentive.

 

To show my hand, I find this action disconcerting.  Going forward, Sardar will benefit substantially more than other shareholders.  Let's say that his economic interest in SNS is 5% of outstanding shares, and SNS has 40 million in future annual FCF.  That puts his share of annual earnings at 2 million and his salary at 900,000.  He benefits nearly 50% more than other shareholders.

 

Granted, he's put forth more effort in the last year, but why not recognize that with an appropriate bonus and a properly incentivized contract?

 

 

 

His real payoff will be when the company's stock reaches full value. I feel pretty confident that $900K/year for Sardar will be the least of our concerns in the coming years.

 

While economically speaking, it should provide more incentive to give a performance based bonus, significantly fewer people would be invested in SNS if the qualitative aspects of Biglari's management were not great. I don't think that a bonus would really make Sardar work any harder than he already is. At least SNS is being run by competent people again- ones that actually know what the time value of a dollar is.

 

On that note, I kinda wonder what a poll of board members would reflect, in regard to their views of Biglari; it seems as if posts regarding his actions generally take up a good amount of room on the board and always make for good conversation. From where I sit, it seems as if people either love everything that he has done or they think that he is pretty untested.

 

 

[Smazz]

Ragna,

dont fool yourself - in any world, $900K/year is a real payoff ;)

[rkbabang]

dont fool yourself - in any world, $900K/year is a real payoff ;)

 

I agree.  indystar.com has an article about it today:

 

Steak n Shake CEO sees pay jump 221%

 

 

Diane Denis, a professor at Purdue University's Krannert School of Management and an expert in corporate governance, said Biglari's salary increase is somewhat unusual because of the way he became CEO. It's common for new CEOs to make more than their predecessors, but that usually happens as the result of a board trying to lure top candidates in a competitive market.

 

Still, Biglari's new salary is "certainly within the realm of what goes on," she said.

 

"I don't have a gut-level reaction that says this is ridiculous, but if I were a shareholder I'd want to know more."

 

 

I agree with him (and many here on this list).  I'd like to hear Sadar's explanation/justification for this.

 

--Eric

 

[Parsad]

I would wait to see what this quarter looks like and how the operations are doing as we run up to the AGM before jumping to any conclusions.  There is no way Sardar would accept such a salary unless the operations had improved enormously. 

 

- He was very particular in pointing out the previous managements deficiencies relative to their compensation. 

- He was adamant about making money with shareholders, not off of them. 

- He took an initial salary that was far under market value when he took the helm to prove that he could turn it around. 

- He still takes no salary from Western Sizzlin, thus the optics of his own compensation are important to him.

 

Let's wait and see what the results are like.  I can see a collegial compensation committee granting him such a salary to keep him happy, but I don't see Sardar accepting something like that unless there is something significant there for shareholders.  We are only a few days away from this quarter's release.  Cheers!

[wabuffo]

There is no way Sardar would accept such a salary unless the operations had improved enormously.  

 

I sure hope so because the optics here are horrible.  Here's an obvious one that I'll be looking for in future 10-Qs, 10-Ks.

Early in fiscal year 2009, we suspended 401(k) matching contributions until profitability improves....

Through fiscal year 2008, we matched 50% of the participants’ first 6% of eligible compensation deferred.  Matching contributions paid in fiscal years 2008 .... were $1,099, ....

 

If Biglari is getting paid $900k per year while the SNS employees are still not getting the 401k match worth perhaps a similar amount, then he loses the moral high ground vs his organization in terms of his "shared sacrifice" message.   That hurts his leadership in all kinds of small and big ways, in my opinion.

 

For example, the optics of his own salary could in turn force him to reinstate the 401k match sooner than prudence would dictate because of his weakened position.  In turn, SNS shareholders would be out the $600k for Biglari's salary increase plus another $1 million for the 401k match.  Any interest rate savings from the debt retirement are thus gone and then some.  

 

Of course, in the long run, this amount may not be material but I sure wish he had turned down the BOD's offer of a raise until the turnaround story at SNS was a distant and documented success.  I feel that his leadership has been tarnished if he's accepted the compensation increase in such a short period of time (and at a time that we can't be sure that the turnaround is nailed down).  Perhaps it doesn't matter but now everyone will take Biglari's exhortations with a few more grains of salt.  He's allowed himself to be painted as just another greedy hedge fund mgr/CEO by anyone who wants to paint him with that brush and he's diminished by that.

 

wabuffo

[scottyjukebox]

Im actually a bit shocked by this move by the board..  but do we know yet that he has actually accepted this raise?  If you would of told me 12 months ago that he would accept a pay package that is 300 grand more than Alan Gilman was being paid (to run the company into the ground) i would not of believed it.  But i must say that im not sitting in the boardroom or on the comp committee so maybe we dont know the whole story.

[prevalou]

maybe there is a misprint in the Sec filing and 90 000$ is the actual figure...