Coke Plan Leaves Some Dry

At Berkshire Hathaway's (BRK.A) annual meetings, the holding company's legendary CEO Warren Buffett has often sounded off on his disapproval of compensation practices in the boardrooms of corporate America.

"I am never asked to sit on compensation committees because of my well-known views on the subject," Buffett reportedly once said. "If you belch too much at the dinner table, you're not invited back."

While the Oracle of Omaha will be stepping down from the high-profile board of directors at Coca-Cola (KO) later this month, those who remain will now be subject to a process that he has long advocated: performance-based compensation. The question that looms, though, is to what extent the change will affect board decisions.

The soft drink giant on Wednesday said it set a three-year goal of 8% compounded annual growth in earnings per share, which is the midpoint of its long-term performance target. Starting this year, its directors will receive stock units each year equal to $175,000. After three years, if the performance target is met, the shares will be payable in cash at market prices. If the company's performance falls short, the shares will be forfeited.

The plan, then, is an attempt to hold directors accountable for the company's bottom-line performance and, to a lesser degree, the performance of its stock price. Coca-Cola will use its 2005 earnings of $2.17 a share, after one-time items, as its base. Analysts polled by Thomson First Call have an average estimate for Coke to earn $2.28 a share this year, which would mark a 5% increase.

The new plan will replace Coca-Cola's practice of paying an annual retainer fee of $125,000, of which $50,000 was paid in cash and $75,000 accrued stock grants. It also eliminates additional fees paid for duties like chairing the company's board committees and attending its committee meetings.