Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Support MFO
Donate through PayPal
Coca-Cola Executive Pay Plan Stirs David Winter's Wrath
I find it hypocritical that he is complaining about pay while his fund carries a 1.63% expense ratio for the institutional share class and 1.85% for the investor class.
If I were a KO stockholder, and his percentages are correct, I'd be voting against the board (but then I usually do.) I see no point funding the indolence of their great-great-great-great-etc grandchildren. "Unfathomable" is a gentle adjective.
Didn't Winters try to call Buffett in on this, as well? Buffett is probably sitting there, reading the letter with his usual Cherry Coke going, "Nah, I'm fine with my 9% of the company." Coke needs to evolve, as probably does McDonald's. Somehow Dunkin Donuts apparently did and turned into a growth story, which mystifies me.
All the companies you listed have a basic killer offering, which they deliver in signature fashion, very consistently...coke in red can/bottle, hamburger quick and cheap, donuts and coffee, decent if somewhat homogenized pizza delivered to your door...can count on each of these being same anywhere across the country, just about.
Ditto for Starbucks. And KFC. Etc, etc.
Once you've saturated the market with your signature product, only place left to grow is by offering new products, no? Or, variations of existing products in new form. These can be developed internally or through acquisition.
All the companies you listed have a basic killer offering, which they deliver in signature fashion, very consistently...coke in red can/bottle, hamburger quick and cheap, donuts and coffee, decent if somewhat homogenized pizza...can count on each of these being same anywhere across the country, just about.
Ditto for Starbucks. And KFC. Etc, etc.
Once you've saturated the market with your signature product, only place left to grow is by offering new products, no? Or, variations of existing products in new form. These can be developed internally or through acquisition.
All very true. I do think that tastes change, times change. Coke has taken a lot of flack lately, from NYC to getting booted from some school lunchrooms. I'm not for government trying to tell us what we can and can't eat, but I think there's a mentality that kinda needs to change.
I mean, if you look at Vitamin Water (which is made by Coke), it has thirty grams (+/-, depending on flavor) of sugar per serving. Doesn't that kinda take away from whatever vitamin content is in the thing? You can get Vitamin Water Zero if you want one that has stevia instead of sugar. The fact that there has to be a "Vitamin Water Zero" to get the "vitamin water" without a half a cup of sugar is kinda ridiculous.
Fast Food is fine, in moderation. People act like they can eat Chipotle all the time because it's "healthy", which always makes me think of Newman's classic rant in the "Yogurt Shop" episode of "Seinfeld".
Dunkin now offers meals so it can act like it's no longer just a sugar bar (now it's a Sugar Bar and Grill lol.)
Starbucks isn't healthy, either (as Jim Gaffigan once noted, "Keep telling yourself that Frappucino is not a milkshake."), but I think Howard Schultz has been smart in his attempts to evolve and branch out (like the Evolution Fresh juices and eventual stores.)
I guess the idea becomes 1:) People can make their own choices, but I think the level of obesity-related problems in this country has to be addressed at some point. Or, if it's not, I'll just keep investing in health care companies. You can invest in McDonalds for current customers and Pfizer for those same customers down the line.
Is the Coke executive pay situation worth concern? Sure, absolutely. Does someone need to tell Coke that they can't just coast because they're Coke? I think so, too. Same thing with McDonalds. People like these things because they know what they're getting whether they're in the middle of nowhere or in New York City, but things change.
Thanks Phanatic, interesting submission to the SEC.
As I understand it, some companies will actually create employee shares of "stock" that is specifically for employee compensation...not the general public. As I understand it, an employee will have a review with their manager and the manager will reward performance with these in house shares. Share value is determined by the company based on growth revenue or some other matrix and they eventually expire as cash compensation at some point in the future.
David Winters was on CNBC today about this. I have never looked at his funds and don't follow KO to know what they may have done or not.
My first impression is that Winters is a lousy communicator even if he has a valid point, not that fund managers need to be. Combine that with media airheads, there is just smoke and dust.
From what I understood his main gripe was that KO had orchestrated a large flow of money from the company to the management. His inability to explain it clearly makes him irrelevant in this fight. From what I understand, the actions of KO, if he is correct isn't very different from the practices at most large corporations even if that seems wrong to a bystander.
If a company has a lot of cash, it can do two things with it. Either invest it in the company to grow the company top line or return it to shareholders via stock buy backs or increased dividends. The latter is what Carl Icahn is trying to do with Apple.
The modern American Management doesn't see a company this way because the shareholders have benefitted from the huge generational inflow of money into equities leading to multiple expansions. They see it more like a Limited Partnership where the top management directly benefits from the company finances while the shareholders bet amongst themselves as a derivative and realize their gains from each other. The recent moves by companies to create non voting share classes goes further in this direction.
So, from the management perspective, they play all kinds of financial games to get the top 5% in the company to take as much as possible for themselves.
The common compensation practice is to tie the compensation to share price. Conceptually, this is wrong in many ways since it incentivizes the management to prop up the share price which may be uncorrelated with the health of the company.
Two easy ways to do this is to do share buybacks or increase bottom line by cutting costs (mostly from reducing labor costs with layoffs and outsourcing). Neither of these necessarily imply the company is growing but both increase the share price and consequently the variable compensation of top management.
American Airlines management a few years ago while on the verge of bankruptcy, was an eggregious example of this. They negotiated a wage decrease with its unions under threat of bankruptcy and set up a compensation scheme to reward themselves if the share price went up. Typically these schemes are top heavy because an average employee gets very little as result of that and their wages make more sense than the individual gain from options.
The airline realized net revenue from this cost cutting and the top management got bonuses that totaled almost the entire net revenue. The per employee distribution of this bonus gave them a few cents on the dollar of the wage cut they had agreed to.
In the case of Coca-Cola, the argument from Winters seems to be that if the company had just done a cash buy back, the shareholders would have benefitted. But KO set up a compensation scheme that rewarded the top 5% handsomely based on share price. This compensation was in stock grants. On paper, this looks great. After all, the management is being rewarded for improving shareholder value.
The problem is how this happens. The stock grants and options dilute existing shareholder value and hurts both. If a company has a lot of cash, it can buy back enough so that the share price increase offsets the dilution and increases it just enough to trigger the bonuses to top management.
So what has happened is that you have transferred a chunk of cash from the company to top management and used more cash to prop up the share price. Instead, if they had used all that cash to just do a buyback, all the gains would have been realized by shareholders. It is a zero sum game in this financial engineering which has very little to do with growing the company. The too management is taking no risks with stock bonuses because they are the ones who decide to use cash to prop up the share price and they know exactly how much.
American corporate management at its finest. But it is not people like Winters that is going to change this.
Comments
Regards,
Ted
Hey, I do like this era of activist investors.
That said, does seem that all it takes to get face time on CNBC is to write an open letter to a company's board, grousing about one thing or another.
Dominos, too.
All the companies you listed have a basic killer offering, which they deliver in signature fashion, very consistently...coke in red can/bottle, hamburger quick and cheap, donuts and coffee, decent if somewhat homogenized pizza delivered to your door...can count on each of these being same anywhere across the country, just about.
Ditto for Starbucks. And KFC. Etc, etc.
Once you've saturated the market with your signature product, only place left to grow is by offering new products, no? Or, variations of existing products in new form. These can be developed internally or through acquisition.
Regards,
Ted
I mean, if you look at Vitamin Water (which is made by Coke), it has thirty grams (+/-, depending on flavor) of sugar per serving. Doesn't that kinda take away from whatever vitamin content is in the thing? You can get Vitamin Water Zero if you want one that has stevia instead of sugar. The fact that there has to be a "Vitamin Water Zero" to get the "vitamin water" without a half a cup of sugar is kinda ridiculous.
Fast Food is fine, in moderation. People act like they can eat Chipotle all the time because it's "healthy", which always makes me think of Newman's classic rant in the "Yogurt Shop" episode of "Seinfeld".
Dunkin now offers meals so it can act like it's no longer just a sugar bar (now it's a Sugar Bar and Grill lol.)
Starbucks isn't healthy, either (as Jim Gaffigan once noted, "Keep telling yourself that Frappucino is not a milkshake."), but I think Howard Schultz has been smart in his attempts to evolve and branch out (like the Evolution Fresh juices and eventual stores.)
I guess the idea becomes 1:) People can make their own choices, but I think the level of obesity-related problems in this country has to be addressed at some point. Or, if it's not, I'll just keep investing in health care companies. You can invest in McDonalds for current customers and Pfizer for those same customers down the line.
Is the Coke executive pay situation worth concern? Sure, absolutely. Does someone need to tell Coke that they can't just coast because they're Coke? I think so, too. Same thing with McDonalds. People like these things because they know what they're getting whether they're in the middle of nowhere or in New York City, but things change.
As I understand it, some companies will actually create employee shares of "stock" that is specifically for employee compensation...not the general public. As I understand it, an employee will have a review with their manager and the manager will reward performance with these in house shares. Share value is determined by the company based on growth revenue or some other matrix and they eventually expire as cash compensation at some point in the future.
My first impression is that Winters is a lousy communicator even if he has a valid point, not that fund managers need to be. Combine that with media airheads, there is just smoke and dust.
From what I understood his main gripe was that KO had orchestrated a large flow of money from the company to the management. His inability to explain it clearly makes him irrelevant in this fight. From what I understand, the actions of KO, if he is correct isn't very different from the practices at most large corporations even if that seems wrong to a bystander.
If a company has a lot of cash, it can do two things with it. Either invest it in the company to grow the company top line or return it to shareholders via stock buy backs or increased dividends. The latter is what Carl Icahn is trying to do with Apple.
The modern American Management doesn't see a company this way because the shareholders have benefitted from the huge generational inflow of money into equities leading to multiple expansions. They see it more like a Limited Partnership where the top management directly benefits from the company finances while the shareholders bet amongst themselves as a derivative and realize their gains from each other. The recent moves by companies to create non voting share classes goes further in this direction.
So, from the management perspective, they play all kinds of financial games to get the top 5% in the company to take as much as possible for themselves.
The common compensation practice is to tie the compensation to share price. Conceptually, this is wrong in many ways since it incentivizes the management to prop up the share price which may be uncorrelated with the health of the company.
Two easy ways to do this is to do share buybacks or increase bottom line by cutting costs (mostly from reducing labor costs with layoffs and outsourcing). Neither of these necessarily imply the company is growing but both increase the share price and consequently the variable compensation of top management.
American Airlines management a few years ago while on the verge of bankruptcy, was an eggregious example of this. They negotiated a wage decrease with its unions under threat of bankruptcy and set up a compensation scheme to reward themselves if the share price went up. Typically these schemes are top heavy because an average employee gets very little as result of that and their wages make more sense than the individual gain from options.
The airline realized net revenue from this cost cutting and the top management got bonuses that totaled almost the entire net revenue. The per employee distribution of this bonus gave them a few cents on the dollar of the wage cut they had agreed to.
In the case of Coca-Cola, the argument from Winters seems to be that if the company had just done a cash buy back, the shareholders would have benefitted. But KO set up a compensation scheme that rewarded the top 5% handsomely based on share price. This compensation was in stock grants. On paper, this looks great. After all, the management is being rewarded for improving shareholder value.
The problem is how this happens. The stock grants and options dilute existing shareholder value and hurts both. If a company has a lot of cash, it can buy back enough so that the share price increase offsets the dilution and increases it just enough to trigger the bonuses to top management.
So what has happened is that you have transferred a chunk of cash from the company to top management and used more cash to prop up the share price. Instead, if they had used all that cash to just do a buyback, all the gains would have been realized by shareholders. It is a zero sum game in this financial engineering which has very little to do with growing the company. The too management is taking no risks with stock bonuses because they are the ones who decide to use cash to prop up the share price and they know exactly how much.
American corporate management at its finest. But it is not people like Winters that is going to change this.