Coke Ties Board Pay to Performance

The soft-drink giant bases pay on an 8% annual EPS growth target for a three-year period.
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Coca-Cola

(KO) - Get Report

announced a new compensation plan for its directors that makes financial rewards contingent on profit performance.

The soft drink giant set a three-year goal of 8% compounded annual growth in earnings per share, which is the midpoint of the 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 worthless.

The plan thus holds directors accountable for the company's bottom-line performance, as well as the performance of its stock price. Coke 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 Coke's practice of paying directors an annual retainer fee of $125,000, of which $50,000 was paid in cash and $75,000 accrued stock grants. The new plan also eliminates additional fees paid for duties like chairing board committees and attending committee meetings. It also provides the option for the board to make a one-time cash award to new directors.

The plan comes just over a month after Coke's largest shareholder, the legendary investor Warren Buffett, announced he would leave the company's board after 17 years as a director. Buffett, who holds an 8.4% stake in Coke, has been an advocate for more accountability for corporate executives and directors amid public controversy about executive compensation. His term on the board ends later this month.

Lee Winfield, a spokeswoman with Coke, declined to comment on any role Buffett may have had in hatching the new compensation plan.

Buffett, via

Berkshire Hathaway

(BRK.A) - Get Report

, bought most of his Coca-Cola stake in 1987 for about $1 billion. The roughly 200 million shares are worth about $8.4 billion at current prices, making it Berkshire's most valuable holding. Still, the stock has been a sporadic performer in recent years, and with its recent price around $42, it's down more than 25% from its highs in 2002.

Coke named Neville Isdell chairman and CEO in late 2004 and ever since his arrival has been pursuing a turnaround effort that has stressed a more balanced sales mix and volume growth.

"This all-or-nothing approach to board compensation aligns the interests of our directors with those of shareowners more closely than any other compensation formula I have seen," Isdell said in a statement.

Shares of Coke recently were down 23 cents, or 0.5%, to $41.85.