Sorkin: What's a reasonable reward at Coca-Cola?

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Posted: Friday, March 28, 2014 12:00 am

Earlier this month, Coca-Cola sent out its annual report and proxy statement to shareholders.

The red-and-white report was relatively predictable. Until Page 85.

That's the page that stopped an analyst who works for David Winters, a longtime money manager and founder of Wintergreen Advisers, in his tracks.

Doing a little quick math, the analyst determined that the company planned to award stock worth about $13 billion to its senior managers over the next four years, based on the company's current stock price. Getting out his calculator, the analyst estimated that between the proposed compensation plan and a previous plan, the company had allocated as much as $24 billion toward stock-based rewards for its senior people.

“I just couldn't believe it,” said Winters, a longtime Coca-Cola shareholder with about 2.5million shares in his fund. “I was so stunned.”

So stunned that last Friday Winters sent a letter, released publicly, to Coca-Cola's shareholders and its board. Coca-Cola has disputed some of his calculations, but Winters says he sees the plan as excessive.

“We can find no reasonable basis for gifting management 14.2 percent of the share capital of Coca-Cola, worth $24 billion at today's share price. No matter how well a management team performs, it is unfathomable that they would require such astronomical sums of money to provide motivation,” he wrote. “This compensation plan appears to place the economic well-being of management far ahead of the interests of the company's owners.”

The compensation plan requires shareholder approval.

Winters also sent a separate letter to one of Coke's biggest and most influential investors, Warren Buffett, who controls 9.1 percent of the stock through Berkshire Hathaway's holdings.

“You have often decried how excessive compensation is so difficult to rein in precisely because shareholders have no direct voice in the negotiation with management and because compensation committees are often comprised of lap dogs rather than Dobermans,” he wrote. “In this situation, with Berkshire as the largest shareholder of the company in question, you hold significant sway over the process.”

Buffett's son Howard, whom his father has said will become the next chairman of Berkshire Hathaway if he ever retires, is on the board of Coca-Cola.

Winters, who is also a Berkshire Hathaway shareholder and a huge fan of Warren Buffett's, said he was dismayed by the proposed compensation plan because, “We want to own Coca-Cola forever” and the compensation program “hurts the underlying investment case.” He said he felt a fiduciary duty to go public with his problems. “We can't support this,” he said.

Coca-Cola, for its part, said Winters' analysis “is misinformed and does not reflect the facts.”

It is hard to make an apples-to-apples comparison of Coca-Cola's compensation program to those of its rivals, like Pepsi. Muhtar Kent, Coke's chief executive, was paid $20.4million last year, which was down 33 percent from the $30.5 million he was paid in 2012. In comparison, Indra Nooyi, PepsiCo's chief, was paid about $12.6 million in 2013.

Coca-Cola said that the plan Winters criticized “is not limited to senior executives, but extends to a large group of employees and is important for incentive and retention. Approximately 6,400 were eligible in 2013. The amount of long-term equity compensation awards granted each year are within industry norms.”

If that is the case, each of Coca-Cola's managers eligible would be entitled to, on average, a little more than $2 million each. Of course, the bonus money won't be doled out equally.

In fairness, it is worth noting that Winters' $13 billion and $24 billion figures are probably somewhat inflated. The calculation treats all shares — options and restricted shares — alike. Executives can cash in on options only if the stock price trades above the grant price.

Moreover, it is not likely that all of the current shares that Coca-Cola has allocated for compensation will be paid out. When employees leave the company, they forfeit restricted shares and options that had been granted to them. Those shares are included in Winters' calculation.

Perhaps most important, Coca-Cola's senior managers need to meet specific performance targets; if they don't, they don't receive the shares. Kent, for instance, received 33 percent less in 2012 because the company didn't meet its targets.

A spokesman for Coca-Cola declined to comment beyond its public statement. Buffett also declined to comment.

Still, Winters argues that the compensation plan would dilute shareholders, whom he said had expected Coca-Cola's share buyback program to make each share worth more, not less.

“By necessity, a large portion of the company's growth in per-share earnings and value must come from shrinking the number of shares outstanding, so that each share is entitled to a larger share of the company's profits,” he wrote to the board. “Now instead of meaningfully reducing shares outstanding and growing value on a per-share basis, this share repurchase program will merely help to offset the new shares issued to management under the plan.”

According to Winters, Coca-Cola's last compensation plan, in 2008, planned to issue 280million shares, split-adjusted; the new proposed plan jumps to 340million shares.

So, I asked Winters: How much should Coca-Cola pay its senior people? He paused. “I don't know the answer,” he said. “But I know $24 billion is excessive.”

He added, “This is a 100-year-old company. They are the custodians of the secret formula.”

Then he said: “They should be well paid.” Just how well paid is up to shareholders.

The Omaha World-Herald Co. is owned by Berkshire Hathaway Inc.

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