U.S. Securities and Exchange Commission
Washington, DC 20549
NOTICE OF EXEMPT SOLICITATION
1. Name of the Registrant:
MCDONALD'S CORPORATION
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2. Name of the person relying on exemption:
CTW INVESTMENT GROUP
___________________________________________________________________________
3. Address of the person relying on exemption:
1900 L STREET, NW, SUITE 900 WASHINGTON, DC 20036
___________________________________________________________________________
4. Written materials. Attach written materials required to be submitted
pursuant to Rule 14a6(g)(1):
CtW INVESTMENT GROUP
May 5, 2014
Please VOTE AGAINST approval of management say on pay at MCDONALD'S, Inc.'s
(NYSE: MCD) Annual Meeting on MAY 22, 2014.
Dear McDonald's Shareholder:
As you are no doubt aware, McDonald's financial and operational performance
has been disappointing for several years: its share price has trailed the
S&P500 over each of the past 5, 3, and 1 year periods, by 45%, 20%, and
20% respectively. Revenue, gross profits, and operating income have been
essentially stagnant since the end of 2010, while its "same store growth
rate" had declined for three years in a row, reaching only 0.3% for
fiscal year 2013. At the same time, doubts about the company's business
model have mounted: McDonald's restaurants have been the site of growing
strikes and protests by food service employees, its long-standing
disavowal of responsibility for workplace standards at its franchised
restaurants faces a serious legal challenge, and the company itself
acknowledges that growing public concern over income inequality poses a
risk to its business.
Unfortunately, the Compensation Committee for McDonald's' board of
directors appears not to have considered how to modify its executive pay
practices to address these long-term challenges. Instead, it has taken a
variety of ad-hoc steps to increase CEO Donald Thompson's already
considerable remuneration, including:
- Raising the CEO's salary and target bonus, such that this year's bonus
equals last year's bonus despite the company missing the relevant
target by much wider margin.
- Altering the Cash Performance Unit Plan ("CPUP") in ways that undermine
its effectiveness in establishing strong long-term performance goals.
- Substantially increasing the equity awarded to Mr. Thompson over last
year, even as last year's award was explained in light of Mr.
Thompson's being promoted to CEO.
These changes reflect a failure to establish executive pay practices that
creatively incentivize problem solving, particularly in the area of human
capital management, and instead provide elevated pay even when performance
declines.
The CtW Investment Group works with pension funds sponsored by affiliates
of Change to Win - a federation of unions representing over six million
members - to enhance long-term shareholder value through active ownership.
These funds invest over $250 billion in the global capital markets and are
substantial investors in McDonald's.
SALARY AND BONUS CHANGES UNDERMINE PAY FOR PERFORMANCE
McDonald's provides short-term incentives to its executives through the
Target Incentive Plan ("TIP") which sets an annual target for the bonus
as a percentage of salary, as well as a target for operating income
growth, the primary performance metric. In 2013, McDonald's as a whole
achieved only 46.9% of targeted growth, down from 62.5% of target in FY
2012. Nevertheless, CEO Thompson received the same $1.4 million annual
bonus as he had received in 2012, because the compensation committee
both increased his annual salary by 13.6% (over and above the increase
he received in 2012 when he was promoted to CEO), and increased the
percentage of salary that his bonus could represent, to 160%, higher
than the targeted percentage at any point in the past five years for
former CEO Skinner. Additionally, CEO Thompson's bonus payment was
increased slightly as a result of "modifiers" that the Committee
explains reflect comparable guest counts growth, customer satisfaction,
control of administrative expenses, and improvements in the "people
modifier" (which we believe is supposed to reflect human capital
management). While the modifier applied to Mr. Thompson's and other
executives' bonuses this year was small (0.5%) it was still positive,
despite the mounting problems and lagging performance noted above. All
in all, the result is that Mr. Thompson has received the same bonus as
last year even as the company's performance has deteriorated
noticeably, the opposite of how a short-term incentive plan should
operate.
NEW, LOW TARGET UNDEWRMINES EFFECTIVENESS OF LONG-TERM CASH INCENTIVES
The Compensation Committee's willingness to take numerous steps in order to
ensure that Mr. Thompson did not suffer a decline in his bonus give us little
confidence that the major change the Committee has made to its executive pay
practices - the decision to move from consecutive to overlapping performance
periods for the long-term cash incentive program or CPUP - will properly
incentivize genuinely long-term performance. We note that the previous CPUP
plan, which paid out in FY 2012, lowered the targeted level of operating
income growth from 7.7% for the 2007-2009 period to 6.5% for the 2010-2012
period, even though the company comfortably exceeded the 7.7% target during
the 2007-2009 period. The Committee has kept this same long-term target in
place even though the company again exceeded it from 2010-2012. Moreover, the
Committee has replaced the other performance measure on which the CPUP is
based, Return on Total Assets ("ROTA"), with Return on Incremental Invested
Capital ("ROIIC"), with a three-year target of 18%. According to McDonald's'
most recent 10-K for the past year, its three-year ROIIC was 20.2%.
1900 L Street, NW, Suite 900 Washington, DC 20036
202-721-6060
www.ctwinvestment group.com
As the figure below illustrates, McDonald's has exceeded this target every
year since it began reporting a three year ROIIC in its 2005 10-K:
MCDONALD'S ROIIC VS. CPUP THRESHOLD, TARGET AND MAXIMUM
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
ROIIC 36.6% 41.3% 39.4% 37.5% 42.9% 38.3% 37.8% 28.6% 20.2%
MAXIMUM 24% 24% 24% 24% 24% 24% 24% 24% 24%
TARGET 18% 18% 18% 18% 18% 18% 18% 18% 18%
THRESHOLD 12% 12% 12% 12% 12% 12% 12% 12% 12%
The Committee appears to be already lowering the required level of performance
to allow further generous payouts to executives, even as performance
deteriorates.
EXCESSIVE EQUITY AWARDS WITHOUT EXPLANATTION
Finally, the Compensation Committee granted restricted stock units and stock
options to Mr. Thompson with a grant date present value of approximately $4.4
million, excluding just under 24,000 restricted stock units granted to Mr.
Thompson to compensate for the impact of the previously mentioned switch from
consecutive to concurrent CPUP performance periods. This grant is well in
excess of the $3.2 million in stock options Mr. Thompson received in July 2012
upon his promotion to CEO, exceeds the grant-date value of the equity received
by former CEO Skinner in 2010 and 2011, and nearly matches the equity grant
provided to Mr. Skinner in 2012, the year he departed the company. The
Committee provides no explanation for why the total value of equity granted to
Mr. Thompson this year should be above the amount that the Committee approved
last year when he became CEO, or the amounts it approved for former CEO Skinne
during two of his final three years.
In light of McDonald's disappointing performance and mounting challenges, we
would have hoped that the Compensation Committee would have taken this
opportunity to rethink its approach to executive compensation, and develop a
plan to incentivize creative solutions to McDonald's slowing growth and
festering human capital management issues. Rather than grasping the nettle in
formulating such a plan, the board has tinkered around the edges of its
existing program, making ad-hoc adjustments to ensure that CEO Thompson
receives steadily growing pay unrelated to performance. This shows a lack of
imagination and ambition on the part of the board and risks long-term
mediocrity for the company.
We urge you to join us in voting AGAINST the Advisory Vote to Approve Executive
Compensation at this year's meeting.
Sincerely,
/S/
Dieter Waizenegger
Executive Director, CtW Investment Group
THIS IS NOT A SOLICITATION OF AUTHORITY TO VOTE YOUR PROXY. PLEASE DO
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