It146;s all or nothing for Coke146;s independent directors

Unique plan links compensation to the company8217;s performance, directors get nothing if earnings don8217;t match targets

The Coca-Cola Company announced an innovative plan yesterday for paying outside directors: If earnings per share do not rise fast enough over a three-year period, directors will receive nothing. But they will get a significant raise if earnings perform as expected.

While many companies give directors all or part of their pay in stock or stock options, Coca-Cola appears to be the first to have adopted a plan that would provide nothing if the company did not perform well.

The idea was enthusiastically supported by Warren E. Buffett, the chairman of Berkshire Hathaway and a Coca-Cola director who is stepping down from the board and will not be eligible for the payments. But it ran into criticism from corporate governance experts who expressed fear that directors could face conflicts of interest.

8216;8216;We8217;ve seen all sorts of problems with managements manipulating earnings to receive incentive payments,8217;8217; said Paul Hodgson of the Corporate Library, a research firm specialising in governance issues. 8216;8216;If the audit committee is also focused on achieving earnings targets in order to receive its compensation, then you have the potential for them to be less than assiduous at detecting potential problems in financial reporting.8217;8217;

Buffett, in a telephone interview, discounted such fears. 8220;I can8217;t think of anything else that more directly aligns director interests with shareholder interests,8221; he said. 8220;As a shareholder, I love it.8221; Berkshire is Coke8217;s largest shareholder.

Buffett said the three-year period would encourage board members to think of long-term interests, and he dismissed the idea of paying directors part of their compensation in stock. 8220;If somebody gets 150,000 in stock for a fee and the stock goes down 20 per cent, they still get 120,000,8221; he said. 8220;I do not think the shareholders8217; interests are aligned there.8221;

It is unclear whether the idea will spread. 8220;It is unlikely to catch on in a big way,8221; said Hodgson, adding that most directors would want to be sure of being paid at least some fee to compensate them for their time.

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Coca-Cola in the past has paid its outside directors a fee of 125,000 a year, part in stock and part in cash, with additional payments for those who served on board committees. The new plan would give them 175,000 in stock each year, with no extra payments.

Over a three-year period, each director would receive additional shares as if he or she had reinvested dividends. In the third year, if earnings per share are 25.97 per cent higher than they were in the base year8212;a compound rate of 8 per cent a year8212;then the director will receive the value of the stock in cash at the market price then.

But if earnings per share are lower than that, directors will forfeit the shares and have worked that year for nothing.

This means that directors in 2006 will keep their shares only if 2008 earnings exceed 2.73 a share, compared with 2.17 in 2005. Those figures are after adjusting for certain unusual items, the company said.

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At any given time, a director would have three such plans at stake. It is conceivable that directors at year-end would have an incentive to bolster earnings to ensure that the target was met. But if that year8217;s target was already going to be met8212;or was unreachable8212;they could have an incentive to delay additional profit to the following year, in hope that this would help meet the following year8217;s target. 8212; FLOYD NORRIS