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Coca-Cola's new pay plan leaves bad taste
April 13, 2006

By Graef Crystal

Las Vegas - Things don't always go better with Coke.

And they might go even worse for Coca-Cola Company's shareholders if the firm

sticks with a new pay plan for its outside directors.

In a misguided bid to burnish its pay-for-performance credentials, Coca-Cola's

board has just promised its members a chance to earn $175 000 (R1.07 million) a

year in free shares if certain targets are met over a three-year performance


For the initial performance period, the goal is an 8 percent annual compounded

increase in earnings a share. If the goal is met or exceeded, the outside

directors will each receive the then value, in cash, of the free shares.

If the goal is not met, the directors receive no pay at all.

A new three-year performance period begins each year.

Previously, Coca-Cola's outside directors received $125 000 a year in a

combination of fees and free shares of Coca-Cola stock.

On the surface, this looks to be a fine idea and was endorsed by billionaire

investor Warren Buffett, who is retiring from Coca-Cola's board next week after

17 years. Buffett's Berkshire Hathaway is the company's biggest shareholder.

Coca-Cola's directors will no longer be sitting on Mount Olympus judging the

performance of their hired hands. From now on, directors will be sweating

alongside the company's top managers, with everyone pulling like mad to reach a

goal that is in the interests of shareholders.

Sounds wonderful. What could possibly be wrong with this gutsy expression of


Plenty, as it turns out.

First, if directors are going to be paid solely on achieving performance goals,

then it means they will have a vital stake in making sure those performance

goals are…...

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