Coke's Secret (Bonus) Formula

Posted by: Matthew Boyle on March 13, 2009

Coca-Cola keeps a tight lid on the formula for its flagship product, which is reportedly stored in a bank vault in Atlanta and can only be viewed with permission from the company’s board. Now, Coke’s board is drawing the same veil of secrecy over the formula used to determine the multi-million-dollar bonuses paid to senior executives like chairman Neville Isdell and CEO Muhtar Kent, who assumed the top slot from Isdell last June.

In a Feb. 23 SEC filing the company said annual executive bonuses for 2008 and beyond will be paid purely on a discretionary basis, rather than based on a specific formula of financial performance measures.

SEC rules require companies to disclose their formula for awarding bonuses, but Coca-Cola argues that such disclosure would put it at risk, as it would "enable competitors to determine the Company's business plan" and adjust their strategy accordingly, subjecting Coke to "substantial competitive harm."

What hogwash. Does Coca-Cola's board of directors really think PepsiCo CEO Indra Nooyi is combing through their SEC filings to steal a march on Coke? (Not that she even has to: PepsiCo has been running circles around its rival for years now.) "This is ridiculous," says Nell Minow, a corporate governance expert at The Corporate Library. Investors need to know what those bonuses are based on, Minow adds.

Coke's previous proxies show that 2008 bonuses for top execs like Isdell and Kent were supposed to be based at least in part on net income and volume targets, which are two key barometers of a beverage company's health. In 2008, Coca-Cola's net income dropped 3% while unit case volume increased 5%.

Now, of course, nobody knows how the beverage giant's board came up with the $4.5 million sum it lavished on both Isdell and Kent for their performance last year. The Feb. 23 filing says the board "considered a number of qualitative and quantitative factors, including, but not limited to, volume growth, earnings per share growth, global volume and value share gains and overall Company operating performance."

Translation? Don't even bother trying to figure it out. The company may as well have included Isdell's golf handicap in its calculations. The point is, nobody knows, and that's inexcusable in today's environment of increased transparency and public outcry over CEO pay on Wall Street and beyond. Whether it was ginned up by Coke's directors or by their new compensation consultants at Towers Perrin, this idea is dumber than New Coke.

I'm not arguing that Coke is paying its top executives too much. By all accounts, Kent has done a good job thus far in a brutal climate. But investors need to know the yardsticks by which a good job is measured. Ironically, in its latest proxy statement Coca-Cola says its compensation plan is designed "to be transparent in intent." Instead, it's as opaque as the brown sugar water it sells around the globe.

Coke will take a tax hit for not disclosing the bonus formula, but it dismisses the cost as "not material." The impact of this scheme on Coca-Cola's corporate reputation, however, might well be.

Reader Comments

Vincent Scarafino

March 13, 2009 3:46 PM

Good for Coke! The way that stockholders are trampled over from all directions (starting with our sad bankruptcy laws) having a public outcry for increased transparency rings hollow.

capitalist

March 13, 2009 5:05 PM

Sorry. Don't own coke stock if you want more transparency than that. When KO starts failing as a company, then we can discuss transparency. Coke has nothing to do with this recession. Therefore, their excuse is they can award their executives whatever bonuses they want

Bonnie Bright

March 13, 2009 5:33 PM

Since when is the purchase of soda deemed a staple? Why on earth would Coca-Cola bunk the needed sustainability of good corporate citizenship?! While maintaining empathy for the plight of shareholders' pockets, I also realize the importance of stakeholders' views on a company's dealings in these weird times. The stakeholders pave the path to branding. It's a no brainer to conclude why Pepsi kicks Coke's butt. This is a very stupid move on the part of Coca-Cola. If I were a shareholder, I would be screaming mad. In these times companies need to be focusing on branding through connectivity of the emotions, not deliberately skirting the very legal matters their constituents are angrily focused on. Sheesh!

Internationalist

March 13, 2009 6:42 PM

I'm confused. By what measure is Pepsi kicking Coke's butt? Comparing recent stock performance surely doesn't tell this story. Nor does the recent Q4 and 2008 year-end results. Travel anywhwere outside of the US (where KO still has a greater share) and you'll struggle to find a Pepsi. Lets face it, its a brand that is and always will be #2. If it weren't for Frito Lay and Gatorade, Pepsi would be headed the way of RC Cola.

Will Monox

March 15, 2009 3:25 AM

Matthew Boyle states "PepsiCo has been running circles around its rival for years now" and Bonnie Bright comments "It's a no brainer to conclude why Pepsi kicks Coke's butt." Excuse me, but you folks have got that back-asswards. Of the two pop-stand arch-rivals, Coke has always been and continues to be the undisputed leader. Pepsi's good, but #2. Check Neilsen if you don't want to take my word for it.

dave

March 15, 2009 5:42 PM

Stock goes up, executives get millions. Stock goes down, executives get millions. Stock goes down even more, executives get millions. Wish I had a job like that.

Ravinder Yadav

March 16, 2009 9:02 AM

what is the formula of bonus calculation

BCR

March 16, 2009 10:49 AM

I'm not a stock holder of Coke, so I don't really care. If I were, I would want to see the bonus structure. Public held companies have that responsibility to their owners. As to public disclosure of CEO compensation to the public, I think in some cases, this is becoming a "witch hunt". Because a company does well, makes a profit, their CEO shouldn't be crucified because he make a good living.

Matthew Boyle

March 23, 2009 3:09 PM

Several readers have questioned my assertion that PepsiCo has outperformed Coca-Cola over the past few years. While it's true that Coca-Cola is still the undisputed king of pop, PepsiCo is much more diversified and actually derives more sales from food than from carbonated beverages nowadays. That diversification, aided by smart acquisitions like Tropicana and Quaker Oats, resulted in PepsiCo delivering an average annual shareholder return of 9% between 1997 and 2007. For Coca-Cola, it was 1%. Over the same time period, annual growth in EPS was 10% for PepsiCo, 5% for Coca-Cola. Coke did post a better fourth quarter than Pepsi did, however.

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