April 6, 2006
Coca-Cola Compensation for Directors
It is front page news today that Coca-Cola will tie directors compensation to earnings growth--less than 8% annual earnings growth, no directors fees. Sounds good -- too good. First, this company has some history of earnings manipulation (channel stuffing) and this will put pressure of firm accountants to use all the "gray areas" in the accounting rules to keep earnings up. Second, the earnings growth should be indexed to the industry. Coke did not use stock price because of industry-wide influences that can overwhelm company specific management choices. Yet earnings growth has similar influences (interest rates for example). The earnings growth needs to be indexed to the industry earnings growth. Is earnings growth higher or lower than beverage companies earnings growth. Third, and most important, it is not directors fees we should worry about. These are peanuts -- it is executive officer salary that matters. Any compensation program that leaves out the salary of the CEO and CFO, among others is a joke and a public-relations ploy. If Coke is serious, give us a CEO all-or-nothing salary on earnings.
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