As I wrote in Getting an $80 Million Salary to Not Work,a couple of weeks ago, directors at companies throughout the America economy are voting for obscene pay packages for management. I don’t think there’s a magic number for executive compensation, but most of us know out-of-whack pay packages when we see them. The recently voted bags of gold for Coca-Cola executives fit that description.
Americans are drinking less soda due to the shift away from sugary drinks. And Coca-Cola is a slow-growth behemoth in our economy. Yet, the compensation to executives called for issuing hundreds of millions of options for shares that would dilute current shareholders by more than 7% over the next four years.
Added to previously un-exercised options, the total hit to Coca-Cola shareholders was more than 13%, which could be upward of $13 billion. You would think this sort of plan would cause outrage… that Coke shareholders would not only vote down such a plan, but would also fire any board member that put forth such nonsense. And you’d be wrong.
One significant shareholder raised a red flag and called on others to join him. He rallied the troops and wrote articles about it. But when the votes were tallied, the measure passed by 83%. Shareholders didn’t seem to care, or at least not enough to vote “no.”
Another shareholder chose to abstain as a show of displeasure. It was Berkshire Hathaway, controlled by Warren Buffett, which owns 9.1% of the company. Yeah, that’s the way to show ‘em Warren. Don’t vote. That really hurts. I’m sure the Coca-Cola executives and board members are all losing sleep over the abstention (or maybe not).
Instead, Coke has proudly proclaimed that 83% of the (voting) shareholders agreed with its approach to compensation.
I’ve got a different take… I think most people in the economy simply didn’t pay attention. This goes back to an article I wrote last December about Occupy Wall Street. I didn’t agree with many of the things that the movement came to represent, but the basic premise was on the money, even if misdirected.
It’s not a bunch of traders or bankers who are moving trucks full of cash from corporate coffers to insiders at the expense of shareholders and line workers. It’s the boards of directors. These small groups not only have the ability to change the status quo, but also the responsibility, and actually the fiduciary duty, to do what is in the best interest of the shareholders. And yet… nothing.
Small groups of people who typically sit on several boards can dole out not eight, nine or 10-figure compensation packages to management teams, but 11-figure packages, and no one bats an eyelid.
I wouldn’t care so much if it weren’t a system that we are almost compelled to be a part of. Given that all of us must participate in the economy and plan for our financial futures, we have to save and invest.
Unless a person has a lot of wealth, exposure to equity markets is almost required to grow a portfolio by a meaningful amount. With the Fed holding interest rates exceptionally low for the last half decade, fixed income can’t provide sufficient returns for most of us.
It’s like being required to gamble at a online casino sites. Yes, there’s the possibility of winning, but the reason the house exists is because the odds are in its favor.
So we’re supposed to buy company stock to provide for our future, but not be too involved in how those companies are run.
I’ve got a different idea: We should ask a lot more questions, and demand a lot more answers.
The current economy is difficult for many people. Every increase in cost or drop in compensation hurts. This is part of what an Economic Winter Season is about. Every financial decision must be scrutinized to make sure that capital is allocated as efficiently as possible, from the individual all the way up to the largest company and even the federal government.
The Fed has confused the process by bloating our economy with new printed dollars and keeping interest rates so low, but the basic points of pain still remain: We have slack demand for labor, a hangover of debt, and limited options for growing our personal stakes.
We should require every person who acts on behalf of others to justify their decisions, and not simply “abstain” from a vote.
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