Management Compensation

Thoughts on corporate management and their rewards from a long-time business associate of FalkerInvestments.

I read with interest the comments of the FI customer regarding your posting of March 31 about GM. I agree with his/her observation about the need for a complete management change. I would take it a step further and say that both management and directors should be changed.

As an investor I am inundated at this time of year with annual reports and stockholder meeting agenda. Most of these request shareholders voting in favor of the adoption of some new or updated management or director incentive stock or compensation plan. In some instances, the proxy materials include proposals by shareholders which would limit either form of incentive compensation (cash or shares) if the company doesn’t meet certain criteria. These proposals are almost always recommended to be voted AGAINST by the directors. The corporate mentality seems to be to continue to provide more rewards for less performance. When you read the proxy and annual report materials and observe the compensation levels these executives and directors are receiving, it is mind-boggeling in light of their performance. Further, there is no incentive for them to change.

It is with this continuing frustration in mind that I read with joy the report in today’s Wall Street Journal of Coca Cola Company’s plan to require that earnings targets be met in order for their directors to receive any compensation. Immediately the naysayers have said that this is a bad idea. They claim it is dangerous to tie directors compensation to EPS because of the temptation to mis-state earnings in order to receive compensation. They also claim that people from academia and the non-profit sector will be less willing to serve as directors if their compensation is not assured. If that is the case, then so be it.

I agree that Coke’s approach is not a final and complete solution to the problem. But it is a great start. If we continue to pay executives and directors millions of dollars for substandard performance, our businesses and the economy will continue to wallow in mediocrity. Congratulations to CocaCola Company for exhibiting some courage and attempting to break the mold to achieve better things. More companies should do the same.