Do kids today still open lemonade stands? I hope so because it is a great way to learn about making good business decisions. That mindset – acting like an owner – is one that successful businesses of all sizes encourage. One way we do this at Coca-Cola is through an equity compensation plan. This essentially offers managers incentives of stock ownership – a real stake in the business – if certain business goals are met.
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As a public company with shareowners big and small, we believe it is important to explain our business in simple terms and respond to those who have a different opinion about how to run the business. After all, they are owners too.
Here is how the equity plan works. A portion of the compensation for a large group of managers is provided in the form of stock options and “performance units” that are linked to the company’s performance. The value of that compensation depends on the increase in the value of the company. If the actions taken by the people running our business result in growth, then the stock price goes up and they benefit. Similarly, if the business doesn’t perform as well, it is likely that the stock price will reflect that and those managers will receive less compensation. We call that “pay for performance.” The goal is to promote the success ofThe Coca-Cola Company by linking the personal interests of employees to those of shareowners. If the company doesn’t perform, managers don’t benefit.
So why has this investor raised questions about the equity plan? According to his letter, he believes that this plan would overly “dilute” the value of the shares he, or other investors, own. But this is not at all the case. Let me explain.
The equity plan requires that we issue shares in the company. If we only did that, then the value of a share of the company would be “diluted” because the individual share would represent a smaller ownership fraction of the company. But that is not the only action we take. We protect the value of our shareowners in a number of ways:
- First, we regularly repurchase shares in the stock market. This reduces the amount of shares on the market which offsets the potential dilutive impact. In 2013, we repurchased $4.8 billion of our stock. That far exceeded the $1.3 billion repurchased related to employee stock options exercises.
- Second, the plan dictates that employees leaving the company forfeit equity compensation that has not vested.
- And finally, because this compensation is tied to company performance, there is the possibility that it will not be earned.
Mr. Winters overstates the dilutive impact of our equity plan. Actual dilution related to equity plans over the last three years has been less than 1% per year and is expected to be in this range going forward.
He also raises another point that is plain wrong – that we are “gifting” tens of billions of dollars to management. He arrives at that figure by calculating the total value of the shares allotted to the plan at the current stock price. This misses two very important facts. First of all, the value of a stock option is based on the difference between the grant price and the stock price, not the total value of the stock. For example, if an employee is given a stock option at $30 and the stock price goes up to $40, the employee can get $10 – not $40. And, most importantly, this compensation has to be earned. This plan only provides compensation if our business performs at a high level.
We believe that our proposed equity plan is financially sound and encourages our employees to act like owners by tying their interests to those of everyone who owns a share of The Coca‑Cola Company. Our business may be a bit more complex than a corner lemonade stand, but at the end of the day, we want our employees to think and act like owners.