The Death of Performance-based Equity and Incentives? - Coca Cola, Wells Fargo others?

Posted by Dan / on 03/03/2009 / 1 Comment

In the past couple of days I have read articles about Wells Fargo suspending its performance-based bonus compensation and Coca-Cola modifying its performance-based compensation.  Links to both articles are located in the "Equity in the News" Discussion Forum (or do a search on each company's name.)

In Wells Fargo's case the change is a result limitation placed on bonuses as a result of receiving TARP money (and the subsequent Dodd amendment to the ARRA). For companies impacted in the same manners as Wells Fargo (and there are many), performance-based bonuses, regardless of the payout instrument, are too volatile to keep active in the current environment.  I find it ironic that the one thing that shareholders, employees, management and the US Government want out of these institutions is improved performance, but incentivizing, rewarding or otherwise compensating this performance is something that doesn't fit into the current compensation limit structure.

In the case of Coca-Cola, the issue is much different.  For years Coca-Cola had performance-based pay that was tied to specific metrics, including financial, internal operational and other metrics.  The new CD&A requirements demand a high level of transparency, including information regarding performance goals.  Coca-Cola was reluctant to provide goal information that it regarded proprietary.  They felt that some of their goals, if made public, would provide information to competitors that Coca-Cola wished to keep private.  The result was a negotiation with the SEC that ended in Coca-Cola's board removing the specificity of performance goals and replacing them with payouts at its own discretion.  Again, counter to common sense the quest for transparency and performance has resulted in a more opaque solution with less assurance that goals are actually tied to the performance of the company.

Coca-Cola argued that if disclosure of confidential information was required that they would change their plan so that goals did not include information that would be considered confidential.

The SECs response, Feb. 15, 2008: “Without more detail, we cannot agree or disagree with your conclusion that you have an appropriate basis to omit the identified performance targets for the completed fiscal year. Since you are in possession of all of the facts related to your disclosure, we have decided that we have no basis to disagree with your decision to omit this information from your filing.”

So as of this year Coca Cola no longer has specific goals.  Well Fargo no longer has performance-based bonuses.

Now, I know what some people will say. "Weren't poorly designed "performance" goals something that lead to some of the indefensible payouts during the past 5-10 years?  Yes, poorly designed programs did fail everyone involved (except those who received the payouts).  What this fails to take into account is the number of well-designed programs that may now be impacted as a result of TARP or SEC positions.

I am true believer in pay-for-performance.  I also believe that specificity of goals and relationship of those goals to the things that are truly important to driving performance at each company are the only way to have successful programs.  If we remove the possibility or performance, or make the goals cookie-cutter to allow for "transparency" we are ensuring that these programs will not work in the future.

I would love to hear you opinions on this topic.



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  • Nicolas says:

    In my view, these events qualify as indicators of a major shift in patterns we saw beginning with the 1986 Tax Reform Act and compounded by the 1996 TRA. They evidence the law of unintended consequences. In the case of Wells, Dick K, the CEO said it best, Wells didn't want or need bailout money, and having to receive it ruins the predictive business model. I’ve seen the same on a board I sit on and it’s now difficult to predict whether performance is based on capital infusion or people related results. In the case of Coke I think the 86 and 1996 acts "overcompensated" forgive the pun, such that the ND&A rules came into effect to close the gaps; which left companies like Coke exposed having to reveal their hands, so they don’t want to play. We are at a juncture where a unique opportunity exists to reinvent the method of pay delivery. Keeping in mind Freud’s basic motivators: sex, fear, and money haven’t changed. I'm happy to further discuss or consult on the issue.
    Nick de Porcel

    March 19, 2009 at 11:53 AM | Permalink


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