DealLawyers.com Blog

Late last week, it was reported that Coca-Cola has adopted a policy of obtaining shareholder approval for its severance arrangements with senior executives if the payout exceeds 2.99 times the sum of the executive’s annual base salary and bonus. The topic of excessive severance pay angers investors more than any other compensation issue – and the recent House bill would require shareholder approval of all severance arrangements for officers.

According to this WSJ article, “Coke spokesman Charlie Sutlive said the company’s board approved the policy in October. It was first publicized yesterday by the International Brotherhood of Teamsters General Fund, which, as a Coke shareholder, unsuccessfully proposed a similar policy at Coke’s annual meeting in April.

Coke’s board opposed the proposal at the time. However, the measure earned support of roughly 41% of shares cast, indicating strong interest among investors.

“We believe this new policy both responds to and is in the best interests of shareowners,” Mr. Sutlive said. He said the board and its compensation committee adopted the policy after noting “the sentiment of many shareowners,” including the Teamsters.

Mr. Sutlive said the new policy reflects the board’s practice of reviewing corporate-governance policies and improving them where warranted. In this case, he said, the board’s compensation committee recommended the policy as a way to add controls while continuing to allow the board to render “prudent judgments.”

The move by Coke comes amid some criticism of executive pay. Steven Hall, a New York-based compensation consultant, said measures such as the one Coke adopted could serve to limit severance deals going forward.

Coke was criticized for the $17.7 million separation package it awarded to former Chief Executive M. Douglas Ivester, who stepped aside in early 2000 after about two years in the job. Steven J. Heyer, who left as Coke’s No. 2 executive in 2004, received a severance package of at least $24 million after three years on the job.

Douglas Daft, who stepped down as Coke chairman and CEO in June 2004, received 200,000 restricted shares of Coke, valued at $8.8 million at the time.”

In Sunday’s NY Times, Gretchen Morgenstern wrote about this development in her column, including quotes from NASPP Chair Jesse Brill and Mike Kesner of Deloitte Consulting, who has spoken on this topic at our compensation conferences. Learn more about how to handle severance pay in our “Severance Arrangements” Practice Area on CompensationStandards.com.