Kansas City Star: Coke Execs’ Cup a Bit Less Fizzy

Kansas City Star: Coke Execs’ Cup a Bit Less Fizzy

December 29, 2005

It may be only 1 inch on the road to reining in executive pay, but it is progress nonetheless.

Last week, under pressure from a big shareholder, the Coca-Cola Co. adopted a new policy requiring that its stockholders approve any future executive severance agreements that amount to at least 2.99 times the recipient’s annual salary and bonus. The shareholder forcing the issue was the International Brotherhood of Teamsters General Fund, which raised the proposal at Coca-Cola’s annual meeting last April.

Before the shareholder vote, Coca-Cola’s management recommended a “no” vote on the proposal. The company gave several reasons. One was that it would dictate a restrictive standard for all severance deals.

Another reason to reject the proposal, the company said, was that each time shareholder approval is sought, it would cost an estimated $2.5 million. That was a good one, considering the $2.86 million bonus the company gave to CEO E. Neville Isdell in 2004.

But with more than 40 percent of the shares cast in favor of the proposal, Coca-Cola’s board approved the change in October. A spokesman said that the change was in shareholders’ best interests and indicated that the company listens to its owners’ wishes.

Coca-Cola is not the first company to adopt such a policy. But given how much Coca-Cola has paid to departing executives in recent years, you can see why the proposal was greeted enthusiastically by its shareholders.

In 2000, for example, after three years as chief executive, M. Douglas Ivester left Coca-Cola with almost $120 million jangling in his pocket. Included were a six-year consulting agreement, office space, furniture, home security service and country club dues. Steven J. Heyer, a former Coca-Cola president, struggled under the weight of a severance package worth $24 million when he left the company in 2004. He held his position for only three years as well.

Still, it is a testament to out-of-control executive pay that under the Coca-Cola proposal shareholders will have a say only when a severance package exceeds 2.99 times an executive’s salary and bonus.

Never mind that a lot of these bums should receive diddly on their departure, since they destroyed shareholder value rather than enhanced it.

Shareholder interest in these giveaways comes not one minute too soon. Severance packages that result when a company is acquired or merges have contributed to some of the more ridiculous payouts this year. The merger of PacifiCare Health Systems and the UnitedHealth Group, completed last week, generated a $300 million windfall for 39 PacifiCare executives, including stock options and retention pay.

Forcing a shareholder vote when severance packages are more than 2.99 times salary and bonus should be just the beginning for activist owners.

For example, shareholders should try to force directors to eliminate severance packages altogether when the executives involved hold a slug of stock or options that will vest when their company undergoes a change of control. After all, the idea behind these packages is that they should help an executive make do in retirement or until he or she lands another job. If the executives hold millions in stock, extra financial cushions are not necessary.

The limit on severance pay at Coca-Cola also ignores another item that companies pay when executives leave: gross-up provisions that cover personal tax bills generated by severance packages. These can be enormous and hidden from view.

Shareholders may also want to consider agitating for caps on severance.

It’s obvious that me-first executives will do nothing to stop the compensation insanity. Their shareholders will have to do it for them. Here’s hoping that in 2006, they are fully up to the task.

The article originally appeared in theKansas City Star on December 28, 2005, and was written by Gretchen Morgenson.