Not the 'real thing': the flawed formula of Coca-Cola's board pay plan.

• Author: Kaback, Hoffer
• Position: QUIDDITIES

BECAUSE Warren Buffett has as good a claim as anyone to be acknowledged as the greatest investor of all time, surely it is prudent to hesitate before taking issue with business ideas he has embraced.

But what to make of the new Coca-Cola Co. director compensation plan Buffett has championed? It provides that directors will be given share grants of $175,000 a year, payable in cash in three years if and only if Coca-Cola achieves 8 percent compounded annual EPS growth.

Consider, first, these disparate assessments:

1. "Experience has shown that incentives have sometimes lured executives to 'push the envelope' of financial reporting. We don't want to see that disease spread to directors, the very watchdogs appointed by the shareholders to prevent questionable accounting practices."--Stanley M. Grossman (The Pomerantz Monitor, Vol. 3, Issue 5, May 2006).

2. "The fact that directors might go without pay is meaningful. It shows, on the part of directors, confidence that the company has a good future."--Prof. Charles Elson, well-known governance commentator (quoted in Bloomberg News article, April 5).

3. "Changes the board from a prudential body and a restraining influence into a bunch of cheer-leaders."--Prof. John Coffee, well-known governance commentator (Financial Times, April 11).

4. "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."--Neville Isdell, Coca-Cola chairman and CEO (April 5 press release).

5. "The worst idea in a long time."--Ken Bertsch, managing director of corporate governance analysis, Moody's Investor Service (May 2 article, Alvarez & Marsal website).

6. "It's hard to envision [the steller Coke directors] risking their reputations by getting involved in earnings shenanigans [for] director payments," but directors who are not rich "might face pressure to ... meet all-or-nothing performance targets."--Scott Fenn, head of policy, Proxy Governance (Financial Times, April 11).

7. The plan will "make it difficult to attract new board members to the company that don't believe the targets can be met."--Warren Buffett (Bloomberg News, April 5).

The governance weaknesses of Coke's plan reveal themselves. Fenn asserts that current Coke directors are temptation-proof yet worries that lesser lights at smaller companies might not be. Fenn's line-drawing involves both reputational and bank balance status.

Buffett says...