Coca-Cola and PepsiCo: Is Your CEO Paid for Mediocrity?

Coca-Cola and PepsiCo executives are making millions in good years and bad. Should you even care?

Mar 29, 2014 at 2:00PM

Through the years, Warren Buffett has decried excessive executive compensation and has resolved to only invest in companies where management's interests are aligned with shareholders. As a large Coca-Cola (NYSE:KO) shareholder, Buffett presumably believes that Muhtar Kent is reasonably compensated for his efforts as CEO.

After a rough year in the beverage business, Kent's 2013 compensation declined 16% to $18.2 million. Kent's counterpart at PepsiCo (NYSE:PEP), Indra Nooyi, saw her pay increase 5% after what was arguably a more disappointing year for her company.

As a result of Kent's declining compensation and Nooyi's increasing compensation, one might conclude that Coca-Cola's pay practices are more shareholder friendly than PepsiCo's. However, hedge fund manager David Winters begs to differ.

Coca-Cola compensation: pay for mediocrity?
David Winters, whose Wintergreen Advisors owns shares of Coca-Cola, recently published letters he sent to Coca-Cola shareholders, the board of directors, and Buffett decrying the company's 2014 equity compensation plan as excessively dilutive. Winters complains that the plan will dilute shareholders by 14.2%.

Winters is a respected value investor with a history of strong performance, so Coca-Cola shareholders should not take his criticisms lightly. Winters' argument centers around the potential dilution of the equity compensation plan, as outlined in Coca-Cola's 2014 Proxy Statement. In the proxy, the company discloses that, assuming all authorized shares under the 2014 plan are granted, existing shareholders could be diluted between 10% to 16.8%.

Ko Comp

Source: Coca-Cola Company DEF14A

Of course, this worst-case dilution scenario only happens in the best-case business scenario; Coca-Cola must meet its financial targets in order for the stock awards to be granted. For instance, the company must hit the following targets in order for executives to avoid a hit to annual compensation: 3.5% unit case volume growth, 7% operating income growth, and 8% earnings-per-share growth. These 2014 targets are higher than what was achieved in 2013.

Metric

2013 Results

2014 Targets

Unit Case Volume Growth

2%

3.5%

Operating Income Growth

6%

7%

Earnings Per Share Growth

8%

8%

Source: Coca-Cola Company DEF14A

Given that 2014 incentive targets are only slightly higher than 2013's disappointing results, shareholders have grounds to question the legitimacy of the compensation structure. However, the company repurchases a large amount of stock each year; it is targeting $2.5 billion to $3 billion in net repurchases in 2014 -- or up to 1.8% of shares outstanding.

Story is the same at PepsiCo
PepsiCo's compensation practices are similar to those of Coca-Cola. PepsiCo's plan rewards organic revenue growth, earnings-per-share growth, free cash flow, and return on invested capital. As with Coca-Cola, PepsiCo's targets are well within the range of doable; the company outperformed on each of its four key targets even in a disappointing fiscal 2013.

However, as far as executive compensation goes, investors could do worse than hitching their saddles to Coca-Cola and PepsiCo. There are much worse companies with excessive compensation practices that make the soda giants look like angels. Moreover, Coca-Cola and PepsiCo tend to shrink their share counts each year, if ever so slightly, so shareholders are not slowly relieved of their ownership in the companies.

Bottom line
Muhtar Kent and Indra Nooyi are probably overcompensated for their roles in leading two of the best businesses on the planet, but their pay is not excessive to the point of destroying shareholder returns. Any attempt to rein in excessive pay should be cheered by shareholders, but these businesses are so great that it will take more than a generous pay package to eliminate their attractiveness to investors.

3 stocks that could become your next huge winner
The one sure way to get wealthy is to invest in a groundbreaking company that goes on to dominate a multibillion-dollar industry. Our analysts have done it before with other great stocks. And now they think they've done it again with three stock picks that they believe could generate the same type of phenomenal returns. They've revealed these picks in a new free report that you can download instantly by clicking here now.

Editor's note: A previous version of this article misstated Coca-Cola's share repurchase plans. In fact, in 2014 the company is targeting net share repurchases (after taking into effect the company's executive compensation equity plan) between $2.5 to $3 billion. The Fool regrets the error. 

Ted Cooper owns shares of Coca-Cola. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of Coca-Cola and PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers