They will instead have a strong incentive to
deliver lowball performance to ensure they get their money.
Second, that strong incentive for lowball performance is reinforced by the
"go/no-go" nature of the new plan. If the 8 percent earnings a share growth goal
is met or exceeded, full payout is made.
If the company falls short, directors earn nothing at all. That makes achieving
the goal even more critical. Achieving, say, 99.9 percent of the goal just is
not going to hack it.
Consider that in 2002, Coca-Cola instituted a long-term performance plan for its
senior executives that offered large sums for meeting an earnings a share growth
goal of 20 percent a year over a five-year period.
Then when it became apparent that the goal could not be met, Coca-Cola
retroactively lowered the growth goal to 16 percent a year. But it did not lower
the amount that top managers could earn for meeting that lowered growth goal.
Even that lower growth goal of 16 percent a year was twice as high as the latest
8 percent goal.
The new director plan does not allow goals to be lowered retroactively. In one
sense, that is good. In another, it simply motivates the adoption of even lower
Third, the earnings growth goal for the first three-year performance period is
predicated on diluted earnings a share from continuing operations.
So if the company is not on the path to making its earnings growth goal, a
simple solution is to dump some money losing business. To be sure, the real
bottom line - diluted earnings a share -will be hit, but not so diluted earnings
a share from continuing operations. The only problem is that some money losing
businesses are losing money because they are in their toddler years.
Dumping them prematurely could deny the company the very long-term future profit
growth that outside directors are supposedly seek View More »