Teardown 5: Beyond Meat
Small public company fights for profitable growth and key employees while overcoming the adverse effects of the pandemic
Beyond Meat is a producer of plant-based substitutes for meat with a mission to fight climate change. The company was founded in Los Angeles in 2009 by Ethan Brown, the current CEO. It went public in 2019 at Nasdaq, currently employs around 470 people, and is valued at $1.86 billion.
The firm operates on the brink of two industries: biotech and pharma and food and beverage. The core business strategies rely on both pillars, as the company acts as an innovator, product developer, and retailer.
Beyond Meat substitutes trendy large animal-based meat products with plant-based equivalents virtually indistinguishable from the original product. Then, the company sells these products directly to the consumers through department stores or in the food service market, where it holds the leading position among the competition with a 22% market share.
The Covid-19 pandemic affected the company in a mixed way. In 2020 at the onset of the pandemic, most food service outlets forming the core of Beyond Meat's business, such as hotels, restaurants, amusements parks, corporate catering, etc., closed, resulting in low profits and no bonus for the executives that year. On the one hand, in 2021, the food service channel revenues increased by 31.7% compared to the previous year, while delays in tests and new product launch diminished the growth rate.
To reestablish the company's growth and long-term profits and successfully compete and retain executive talent in the tight California market, Beyond Meat compensation committee hired Willis Towers Watson consultants to analyze, benchmark, and craft the new executive compensation plan suited to the company's particular needs.
Let's see what the results are.
Beyond Meat executive compensation plans
Main goal: To quickly regain the growth trajectory by aligning executive decisions with pressing business priorities while keeping the ability to retain those executives in the competitive market conditions.
Means: Beyond Meat does this by implementing a competitive executive pay plan typical for an American public company. The 92% of the NEO compensation is at-risk, with long-term incentives forming 84% and targeted at 50th to 75th percentile of the peer group based on food & beverage, biotech & pharmaceuticals, and high-growth financial profile companies.
The WTW consultants restructured the short-term incentive plan to reflect the company's business strategy and increased the pay-out frequency of both long and short-term incentives to monthly and quarterly disbursements encouraging step-by-step progression towards the preset targets.
Elements of the compensation package
Base salary:
The company offers fixed salaries of 8% to 9% of the total direct compensation to all the named executive officers. This amounts to $500 000 base cash for CEO Ethan Brown and $365 000 - $475 000 for the other executives.
Annual incentive plan:
The WTW consultants modified the short-term incentives for 2021 to support:
- the executive alignment with pressing business needs,
- frequent communication about Beyond Meat's priorities,
- and assure critical employee retention following the lack of STI payouts in 2020 due to the pandemic's impact on the company's performance.
The 2021 short-term incentive plan forms 8% of CEO and 6% of other NEOs' total direct compensation, percentwise in line with the average public company. The grant for the CEO amounted to $500 000.
Smaller companies are typically more long-term incentive focused than bigger ones as they are cash-constrained.
Jack Connell
Leading Expert Consultant and CEO at Jack Connell Compensation Consulting
The annual incentive plan was replaced with a quarterly STI bonus plan with performance cycle and disbursements running every quarter to encourage the achievement of goals and monitor progress.
The committee set up individual and corporate metrics for the CEO and just corporate metrics for the rest of the named executive officers to foster teamwork among the C-suite and emphasize the importance of company performance.
The metrics for each quarter were limited to the following financial performance metrics:
- retail market share at 20% weighting: meant to encourage expansion, distribution, and new product launches to secure the leading position and further grow the retail market share
- foodservice market share at 20% weighting: meant to encourage expansion, distribution, and new product launches to secure the leading position and further grow the foodservice market share
- net revenues at 40% weighting: incentivizes revenue growth through actions such as driving the cost of the product down eventually to match the price of the animal-based protein, soliciting competitive bids for ingredients, decreasing the packaging cost, increasing manufacturing throughput, and optimizing internal processes.
- adjusted EBIDTA at 20% weighting: meant to encourage effective cost management through actions listed above.
The quarterly pay-outs were not equal but set up so that for the first three quarters, the executive receives 20% of the total annual bonus, and upon hitting the fourth quarter target, the 40% grant kicks in.
To further incentivize the progressive fulfillment of the goals, an additional award equal to whichever the more significant: I. the sum of the quarters OR II. the annual achievement-based payout was triggered if the cumulative annual target was hit.
Yet, for 2021, only the Q1 and Q2 targets were hit, resulting in the annual bonus pay-out of $180 000 for the CEO instead of the planned $500 000. The situation was similar for the other members of the executive team.
Long-term incentives for the executives
The long-term incentive plan comprises 84% of the total direct compensation of the senior executives. Half of which (42%) comes in the form of restricted stock units (RSUs), and the other half in stock options with 0 initial value.
The total value of the target equity amounts to $5 500 000 for the CEO, similarly to the NEOs. The vesting times equal four years, and the company grants the award quarterly in case of the restricted stock (1/16 of the total shares vest every quarter) and monthly in case of stock options (1/48 of the total shares vests every month).
Competitive compensation package driving the growth short- and medium-term
Beyond Meat's executive compensation plan is percentwise in line with the typical American public company package at 8% fixed base pay, 8% annual incentives, and 82% long-term incentive plans.
One of the compensation committee's concerns was employee retention in the face of no bonus payout in 2020.
As a result, the WTW consultants proposed a plan that would be competitive across the benchmarked companies from the food & beverage, biotech & pharma, and other high-growth industries, with the long-term equity compensation falling between the 50th and 75th percentile and the total direct compensation between 50th to 60th.
This is a significant improvement from the previous years, where according to the WTW analysis, the equity compensation fell around the 50th percentile of the food & beverage companies but significantly below the rates of peers in biotech, pharma, and high-growth sectors. Granting the extreme competition for executive talent in this area, this was a critical improvement in the compensation package design.
Another impulse to change came from the need to quickly stimulate the growth curtailed by the pandemic and the will to sustain and expand the market share leadership in the retail and foodservice sectors.
Beyond Meat’s STI plan redesign with frequent payouts and monthly/quarterly vesting schedules for the LTI plan is aggressive. It was designed to correct for several concerns at once (several years of being slightly below market, benchmarking to the appropriate industry, COVID related losses in pay, and retention concerns).
Rekha Gurnani Chowdhury
Head of Compensation & People Analytics at Box, Wharton Executive MBA Candidate
The compensation package design reflects the need to drive the results fast. Performance-based short-term incentive plans are disbursed as quarterly awards, significantly more frequently than typical annual bonuses. And long-term incentives with a medium vesting time of 4 years, vest monthly for stock options and quarterly for the restricted stock.
Such frequent vesting periods are pretty unusual, and here clearly serve the purpose of:
- driving the shareholder value up as soon as possible - at-money stock options are pretty much worthless if the company stock does not increase. Vesting in monthly increments, the executive accumulates equity quite quickly, and it is in his or her best interest to increase the share value so that the stock options gain some worth.
- attracting, motivating, and retaining key employees - the quarterly grants of restricted stock and STI bonus paid out in cash present solid financial incentive to stay.
Coupled with the monthly stock options grants that accumulate value with the stock increase, the compensation package is quite attractive because it quickly rewards fast results. Especially if we compare it to the Amazon or Tesla executive compensation packages with long vesting schedules and additional hold periods.
The mechanisms used in Beyond Meat executive compensation plans encourage the professionals to stay with the company and motivate them to continuously improve and retain shareholder value. As the results of 2021 show, it's not always possible, yet the incentive is there.