Exploring Corporate Governance Around the World

By Allison Garrett, Senior Vice President for Academic Affairs at Oklahoma Christian University

Thursday, April 06, 2006

Coke Adopts New Directors' Compensation Plan

Coca Cola announced a new directors' compensation plan under which director compensation will be tied to whether the company hits EPS targets (see the New York Times story here). It's an interesting idea and the company says that it will more closely align directors' interests with shareholders' interests.

The plan, though, seems to have some serious flaws. First, if the plan aligns directors' interests with anyone's, it would seem to align directors' interest with the interests of executives whose compensation may be tied to EPS targets. Normally, the compensation committee at large companies reviews annualy whether performance targets were met in order to assure that compensation exceeding $1 million will be deductible under section 162(m) of the Internal Revenue Code. Those same compensation committee members who will certify whether performance target have been met will presumably also be certifying achievement of EPS goals that have the direct result of increasing their own compensation. It seems that, unless Coke has decided that it's not interested in jumping through the hoops to deduct compensation over the $1 million mark, there aren't going to be any independent directors to certify that performance goals were met.

Second, shareholders elect directors to provide objective, independent business judgment. Although stock options have been given to many directors for years, the Coke plan marks a significant chipping away at independent judgment where the directors' compensation is tied so clearly to executive compensation.

Finally, there's been a lot of press in recent years about earnings management. Some companies have squirreled away earnings, recognizing them in later periods to even out a company's earnings or to assure that bonuses are received in both periods. Now the Coke plan provides incentive for outside directors to overlook earnings management.

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