While director pay is not as pressing an issue, it nonetheless is a board responsibility and, for a number of reasons, boards need to get this right. We begin here with how one successful company tried a new pay paradigm that raised more than a few eyebrows.
A few years ago Coca-Cola announced a new method for paying board members. Under the program, directors would receive $175,000 in stock each year, compared with their prior pay of $125,000 in cash and stock plus payment for committee service. The catch in the new plan was that to receive the stock award, the company's reported earnings per share had to increase at an annual 8 percent rate, compounded, for three years. At the end of that period, if per share earnings were about 26 percent higher, directors would get the cash plus amounts representing reinvestment of dividends. But if earnings were any less, the directors would get nothing. Not for meeting attendance, committee service, being a committee chair—not even a retainer. Nada. Zilch.
“As a shareholder, I love it. I've never seen a payment plan that more directly aligns director interests with shareholder interests.” That is no less than Warren Buffett talking, not me. Mr. Buffett, by the way, had announced he was stepping down from the Coke board, but Berkshire Hathaway reportedly continued to be the company's largest shareholder.
Yes, at first glance this program makes great sense. Directors have a direct stake in the company's performance. ...