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Coca-Cola’s (NYSE:KO) executive team is under fire from Wintergreen Advisers, a money management firm that operates the Wintergreen Fund (NASDAQ:WGRNX)(NASDAQ:WGRIX) and owns 2.5 million shares of Coca-Cola stock on behalf of clients. The ownership stake is relatively tiny — just a fraction of a percent of Coca-Cola’s 4.41 billion outstanding shares and valued at about $96 million — but it is large enough to empower its owners to speak out.
In a series of letters to Coca-Cola management and the company’s shareholders, including a separate letter to Berkshire Hathaway (NYSE:BRKA)(NYSE:BRKB) Chairman and CEO Warren Buffet, who is a major shareholder, Wintergreen Advisers argued that the company’s executive compensation plan amounts to “an unnecessarily large transfer of wealth from Coca-Cola’s shareholders to members of the Company’s management team.”
Here’s how: Combined with an already approved compensation schedule, the new proposed Coca Cola equity plan will dilute the stock by 14.2 percent over the next four years. This would be done in the usual way, by issuing a tremendous amount of stock and options to the company’s top management (or, in other circumstances, as part of an acquisition or to finance debt). The 2014 compensation plan would issue 340 million shares alone, split between options and full-value shares, worth approximately $13 billion as of March 24.
“In effect, the Board is asking shareholders for approval to transfer approximately $13 billion from all of our pockets to the Company’s management over the next four years,” said David Winters, Wintergreen Advisers’ CEO, in his letter to Coca-Cola board members. “When combined with awards from previously approved compensation plans, this figure rises to $24 billion.”
Winters continued, “From a shareholder’s perspective, the details of the Plan itself are not any more appealing than the idea of transferring 14.2% of the Company to management.”
It’s not just the size of the program that Winters finds suspect. Writing to Buffett, Winters argues that the “proposed plan allows Coca-Cola’s Compensation Committee to exclude things such as write-downs, impairments and other extraordinary nonrecurring items when deciding whether or not management has met the performance goals required to trigger their pay day. They can, in effect, move the goal posts closer once the ball is in the air.”
Winters’ appeal to Buffett is straightforward and contains the kind of reasoning generally expected of value investors. To Winters, it appears as though Coca-Cola has, at best, lost sight of how meaningful executive compensation should be determined — or at worst, it appears as if the company is putting the interests of management ahead of the interest of the shareholders.
Winters said in his letter, “We believe that the shareholders of Coca-Cola, including Berkshire Hathaway, will be best served by shareholders voting down Coca-Cola’s Equity Plan proposal.”
Coca-Cola, for its part, has responded to the letter by saying that Winters is “misinformed” and that his argument does not “reflect the facts.” In a written statement to CNBC, Coca-Cola said, “The long-term equity compensation program is tied directly to the achievement of specific business goals and the financial health of the company.”
The soda maker continued: “The plan is not limited to senior executives, but extends to a large group of employees and is important for incentive and retention. Approximately 6,400 were eligible in 2013. The amount of long-term equity compensation awards granted each year are within industry norms.”
Pay increases for top executives are becoming more commonplace as the U.S. economy meanders through the recovery. For example, PepsiCo (NYSE:PEP) CEO Indra Nooyi received a 5 percent pay increase in 2013, according to the pay package formula used by the Associated Press. Like Coca-Cola’s compensation packages, Nooyi only receives bonus compensation when the company meets certain goals. Her raise in 2013 was the result of strong financial performance during a year of transition.
Both companies have faced strong headwinds over the past few years, but PepsiCo shareholders have experienced a 5 percent increase in the value of their holdings over the past 52 weeks, while Coca-Cola stock is down about 4 percent over the same period.
“At a time when Coke is facing slowing growth in both sales and profit, we do not believe it is in the best interest of shareholders to compound the company’s headwinds by significantly diluting shareholders,” Winters wrote.
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