by Cydney Posner
Coca-Cola’s decision to scale back the use of its equity compensation plan and adopt “equity stewardship guidelines” has certainly received a lot of press – for an equity plan, that is. (See for example, these pieces, in the WSJ, here and here, thecorporatecounsel.net blog, Reuters , Bloomberg, CFO.com and the NYT. Generally, under the new guidelines, the company will take steps to reduce the plan’s burn rate (defined as the number of shares granted as a percent of shares outstanding) so that the pool of shares in the plan will last until the plan expires. The question now –assuming that the new guidelines suffice to assuage the shareholders pressuring the company — is whether some version of the new Coke guidelines will soon become de rigueur for equity plans at other large companies.
The decision stems from the pressures on Coke, in light of the company’s less-than-ideal recent financial performance, to rein in its executive compensation, notwithstanding shareholder approval of the equity plan at the last annual meeting. When these pressures come from a 9% shareholder – and when his name is Warren Buffett – the company tends to pay attention. It has been reported in the WSJ that Mr. Buffett abstained from voting on the plan proposal, but expressed his disapproval privately to Coke management and publicly to the WSJ, characterizing the plan as “excessive.” (Apparently, he disapproves of “pay plans that rely heavily on stock options, calling them ‘lottery tickets’ for executives that often generate outsize rewards.”) Buffett said that he chose to abstain (instead of voting against the plan proposal) “to make clear he wasn’t attacking Coke’s management or directors.” At the same time, a smaller, more vocal hedge fund activist had been vociferously complaining about the prospective dilution from the plan.
So what exactly do the Coke “equity stewardship guidelines” provide? (“Equity stewardship guidelines”? Really?)
- Burn rate: Coke commits to limiting its annual burn rate under the plan to “a maximum of 0.8% in 2015, and an average of 0.4% for the remaining life of the plan.” Coke anticipates that those burn rates should allow the number of shares authorized under the plan to last for the plan’s full 10-year term.
- Transparency: the company’s annual meeting proxy statement will disclose actual dilution, burn rate and overhang.
- Share repurchases: The company will use all of the proceeds from stock option exercises by employees to repurchase shares in the market, in addition to continuing share repurchases under its regular buyback program.
- Open dialogue: Coke “will continue to encourage ongoing open dialogue with all of [its] shareowners and seek feedback on equity compensation, including the mix of equity vehicles, performance metrics and alignment of pay with performance.”
While that’s the extent of the commitment in the formal posted guidelines, the press release accompanying the guidelines adds that the company intends to shift the majority of its employees who receive long-term incentive awards from stock-based awards to cash-based awards and to shift the mix of equity awards for those still eligible to receive equity (approximately 1,000 managers or 1% of global employees, according to the WSJ) to “be more heavily weighted to performance shares and less heavily weighted to stock options. After a one-year transition, by 2016, the mix is expected to be approximately 2/3 performance shares and 1/3 stock options.” The current mix is approximately 60% options and 40% performance units. In addition, performance metrics “will provide a balanced approach to incentives, increase alignment with local operations and pay for results that employees can more directly influence.” According to the WSJ, the revised plan would reduce potential issuances from 340 million shares over four years to about 200 million shares over 10 years, which the company states will result in potential dilution of less than 5% over the life of the plan.
It may be that the steps taken by Coke — amusingly, the WSJ link, but not the title of its article, refers to Coke’s “tweaks” of its plan — will not be enough to appease its angry hedge fund activists; one of those activists characterized the guidelines as “just more red glitter in the air.” In addition, some investors may disapprove of an expansion of cash awards, in lieu of equity, which some view as way to align the interests of employees and stockholders. Moreover, it remains to be seen whether the Coke guidelines and related actions take hold as standard practices at other companies or whether other hedge fund activists will now require companies in which they invest to adhere to similar burn rate targets, equity mixes, eligibility limitations, or buyback or disclosure practices.