The Advisors' Blog

– Broc Romanek, CompensationStandards.com

In its proxy statement filed recently, Coca-Cola discloses that it went back and forth with the Corp Fin Staff over whether to disclose performance targets under its Performance Incentive Plan based on a competitive harm argument. It seems that the Staff didn’t buy the argument and required Coke to disclose the targets for its business units.

In response, Coke changed direction and instead gave up their performance-based plan and switched to discretionary awards. I hope fear of disclosure doesn’t become a trend that drives companies to design pay arrangements with boundless borders – but I understand companies other than Coke had already taken this approach before Coke. So I’m not singling out Coke as there are a number of companies in this category.

Below is the relevant disclosure from pages 38-39 of the Coke proxy statement:

“Typically, the annual incentive to all employees is paid under the Performance Incentive Plan using a formula, as described in the Company’s 2008 Proxy Statement, based on objectively determinable business results. The Company has never disclosed the exact business targets or their interrelationships used under the formula to determine the annual incentive because doing so would result in competitive harm to the Company. In addition, the Company does not believe that such disclosure would be material to shareowners’ understanding of the plan. In May 2008, the Company received a comment letter from the SEC requesting that we disclose the exact performance targets used for the Performance Incentive Plan. The Company did not believe such disclosure was required. After extensive discussions with the SEC over a number of months, the SEC then requested that we disclose the range of business performance targets and the personal performance factors for each Named Executive Officer. The Company believed that disclosing the ranges would allow a competitor to recreate the matrix of business performance targets and use this information to determine our business strategy.

Therefore, the Compensation Committee decided to approve discretionary bonuses for the Named Executive Officers for 2008 rather than base incentives on those confidential business performance targets. This means that the incentives paid to Messrs. Isdell, Kent, Finan and Cummings (the U.S. based Named Executive Officers other than the Chief Financial Officer) will not be deductible for tax purposes for 2008 pursuant to Section 162(m) of the Tax Code. The Compensation Committee weighed the additional tax cost versus the competitive harm in disclosing the plan targets and determined that the potential competitive harm significantly outweighed the additional tax cost, which was not material.”