Coca Cola’s Reduced Options

Posted by Marc Hodak on October 2, 2014 under Executive compensation, Governance | Read the First Comment

Yesterday, Coca Cola caved in to the bad press regarding the equity plan they proposed last April–and passed by nearly 90 percent of voted shares–by altering their equity award guidelines.  It’s fun to speculate about the various forces arrayed for or against the Coke equity plan, and what Warren Buffet thinks, and how the press has reported the issues at stake.  But I’ll sidestep all the juicy speculation and bright fireworks and go straight to the only thing that matters, or ought to matter, to shareholders:  Is the new Coke policy better than the old Coke policy?

Let’s start with the policy change itself, which has three parts:

1.  Coke will be providing more transparency about the rate at which equity is being awarded (burn rate, dilution, and overhang)

2.  Coke will be using equity more sparingly in “long-term plan” awards, instead favoring cash

3.  Coke will be awarding far fewer options from their equity pool than before relative to performance-based stock

The effect of the latter two policies will be to significantly reduce the number of shares used to compensate management.  What they are NOT changing is just as important as what they are changing.

–  They are not changing the target value of “long-term plan” awards to management.  If an executive had a $1 million target long-term award, they will continue to have a $1 million long-term award; it will simply be paid more in cash than in equity.

–  They are not changing eligibility for awards.  They continue to believe that equity awards should be broad-based within the company.

So, what have the shareholders gotten out of these changes?  Well, management and the board will finally be able to step out of an unwanted limelight over pay.  Shareholders benefit from managers and directors being able to focus on business with one less distraction.  As for the economic benefits to the shareholders, that’s pretty easy to estimate, too:  Nothing.  Read more of this article »