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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.
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