The cup of executive compensation runneth over for Coca-Cola
CEO Muhtar Kent, but investors haven't shared the same returns.
via Adam Wyles.
It's usually only government programs that see spending
increases described as "cuts," but now we can also add
to the list of places where it seems less really means
The beverage giant revamped its executive compensation
practices last year by changing how long-term incentive awards
will be doled out after it came in for some mild criticism from
Yet the only reason CEO Muhtar Kent's total compensation for
2014 is lower this year than last is because he turned down a
$2.5 million bonus the board of directors awarded him. Had Kent
accepted the big payout as he had the year before, his total
compensation would have been greater.
Losing its effervescence
Led by investor Wintergreen Advisers, Coke shareholders staged
a mini-revolt against the beverage giant's policies last year,
believing they had the
chairman firmly on their side. And while Buffett did tell the
board of directors he was
against the plan
as he thought the compensation "excessive," when it came time
to actually vote against the package he merely abstained. Kent
ended up pocketing almost $18.2 million in 2013.
But Coke said Buffett's rebuke was enough to make it rethink
how it distributed long-term incentive awards, and instead of
skewing them in favor of stock options over performance awards,
they'll now be split 50-50. There will also be fewer of
them handed out.
Tiny bubbles bursting
According to Coke's proxy statement, Kent's total compensation
for 2014 was $25.2 million, or 24% more than the $20.4 million
he earned in 2013. But the bulk of the increase is the result
of changes in the value of his pension and deferred
compensation. Ignore them, and Kent's total is $18.12 million,
virtually unchanged from the $18.18 million he made the year
But keeping it apples-to-apples, Kent's compensation would
have been 13% higher this year had he turned down his bonus in
2013 as well.
No need to be worried CEO Kent will have to do more with
less. Image: Coca-Cola 2015 proxy statement.
Pay for non-performance
Moreover the folks at shareholder activist group As You Sow
recently released their survey of the
100 Most Overpaid CEOs
, which analyzed executive compensation using over 30 "red
flag" indicators and concluded there is virtually no
correlation between executive pay and company performance. It
said Kent's 2013 pay package was No. 27 on the
list of worst offenders
for overpaying their CEO.
Using some basic statistical techniques to map actual
performance to predicted levels of pay, As You Sow found Kent
had "excess pay" of more than $8.3 million. Put another way, if
Kent was really being paid based on how Coke performed, his
total compensation would have been just $12 million that
That ought to be irksome for investors, but maybe they
should also question why there are such big fluctuations in
Kent's pension value, which happens primarily because Coke
manipulates the discount rate it uses to determine the present
value of its pension liabilities.
Coca-Cola's $18 million man, CEO Muhtar Kent. Photo:
via Fortune Live Media.
When looking at pension plan accounting, there are two aspects
to consider: the rate of return a company earns on its
investments and the rate it uses to discount future obligations
back to a present value. Playing with either one can allow
management to massage results for greatest effect.
According to its annual report, Coke figures it can earn
8.25% on its investments even though more than half of its
plan assets are in non-equity investments. This suggests those
assets are really more low-risk than high-return (which is
appropriate for a pension plan), but that allocation also makes
it extremely difficult to achieve the kind of returns the
pension plan needs.
Indeed Coke's pension liability is quadrupling from $34
million in 2014 to $134 million this year because of the poor
performance of its investments and the changes it made to the
The beverage giant used a 4.75% discount rate in 2013 before
dropping it to 3.75% last year, a move expected to cause Coke's
pension expense to jump by $94 million. That would
certainly provide enough incentive for Coke to be optimistic
about its investing acumen.
Digging a deeper hole
Worse, the fair value of Coke's pension plan assets totaled
$8.9 billion at the end of last year while its obligations
were over $10 billion, leaving a $1.1 billion deficit, which is
exacerbated by its use of unrealistic assumptions. That's
also nearly half a billion more than all the profits it
earned in 2014.
While Kent's long-term incentive pay should see an $8
million reduction this year because of the changes forced on
the board, investors will still want to keep an eye on
Coca-Cola's pension maneuvers. They not only serve to inflate
the CEO's compensation, but they also have significant
ramifications on the company's financial health.
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Does Coca-Cola Inc's CEO Deserve a 24%
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