The Marketplace Report: No Profit, No Pay at Coke
MADELEINE BRAND, host:
Back now with DAY TO DAY.
The Coca-Cola Company is making a dramatic change in the way it compensates board members. They could get raises if they meet certain spot performance goals, but they could also end up with nothing. Marketplace's Janet Babin is here, and Janet, how will this new compensation package work?
Ms. JANET BABIN (Marketplace): Coca-Cola says the new plan will play directors equity share units each year that are equal to a flat fee of $175,000, but to get the shares, they'll have to initially meet a three-year performance goal of 8 percent growth in earnings per share, so they won't get cash anymore at all; they'll get equity share units, and if they don't meet the performance targets, those will be forfeited as well, so they could end up with nothing.
BRAND: And so this obviously puts a lot of pressure on them to perform well.
Ms. BABIN: Well, Coke says that the change more directly aligns stockholders' goals with those of board members, but yes, some corporate governance experts are concerned about the pressure that this will put on boards, or on this board.
And I spoke to Business Ethics Professor Laura Hartman at the DePaul University about this, and she does think this plan is a step in the right direction. It's a move away from, or managing somehow, to control the spiraling rise we've seen often in executive and board pay, no matter what's happening with the company.
But she does worry that the Coke plan is too narrowly focused. It's concentrated only on the stock price, and that that could backfire.
Professor LAURA HARTMAN (Business Ethics Professor, DePaul University): Many decent, decent people are pressured by incentives like this to make decisions they might not otherwise make, because the downside is so enormous. You know, they miss the stock price by a dime, they don't get compensated for that entire year, and that creates an awful lot of pressure to do what some might consider to be legal but yet perhaps unethical.
Ms. BABIN: And while the Coke board won't be so focused on quarterly results, they'll be focused on that three-year goal, Hartman does say the plan still rewards more short-term thinking, and boards are traditionally supposed to be more concerned with long-term strategy.
BRAND: But Boards have other things to do, don't they? People who serve on them usually have other jobs.
Ms. BABIN: That's right, and if you look at Coke's board, I mean Warren Buffett and Kathleen Black, president of Hearst Magazines, they clearly don't need this money, but Hartman still says, you know, $175,000 is $175,000. And also, some board members have ties to non-profit organizations or government, so they do depend on that compensation. So this carrot and stick, she says, will likely work.
BRAND: Janet Babin of public radio's daily business show, Marketplace, and Marketplace is produced by American Public Media.