Pepsico Case Study

Luying Wang  Week 2

I. Corporate Objectives and Incentives 1. 1996 was the last year that Wayne Calloway served as CEO of PepsiCo. Review the Compensation Committee Reports for 1996 (from the proxy statements filed in March 1997) to determine the measures used to evaluate and compensate the performance of the top executives of PepsiCo and Coca-Cola. What performance measures are used to determine payouts to executives of PepsiCo and Coca-Cola from short-term and long-term incentive plans (other than stock options and other stockbased plans)? How are the objectives (as reflected in the performance measures used as the basis of executives’ incentive plans) of the two companies similar? How are the objectives different?

Short-term for PepsiCo: Salary ranges for the CEO and the other executive officers are based on the underlying accountabilities of each executive's position. Bonus awards for PepsiCo's CEO and executive officers are paid based on PepsiCo's overall performance against specified earnings growth targets set in advance in accordance with the shareholder.

Long-term for PepsiCo: Long-term awards have generally been granted every other year in the form of performance units and stock options. Performance units are paid after four years based on achieving earnings per share growth targets set in advance by the Committee.  Stock options are granted at market value and increase in value only to the extent of appreciation of PepsiCo’s capital stock.

Shore-term for Coco-Cola: Target annual incentives is based on earning per share gain, unit volume increase and change in share of soft drink sales. 95% of award is determined from equal weighting on volume growth and earnings per share, with the remaining determined by market share change.

Long-term for Coco-Cola: There are three forms of long-term incentives utilized for executive officers, including stock options, restricted stock and long-term incentive plans with cash awards.  The restricted stock plans are designed to focus executives on the long-term performance of the company for the duration of their careers. The long term incentive plan is a three-year performance plan. Unit case volume growth and growth in economic profit are the two performance measures which drive the plan. The weight of each factor carries approximately a 50% weight.

The similarity is that both companies’ incentives focus on earnings growth, and both have short-term and long-term plans and relative performance targets (e.g., EPS). The difference is that PepsiCo’s compensation plan only focus on the earning per share growth, while Coco-Cola also focus on volume growth in both short-term and long-term, and growth in economic profit in the long term. In addition, Coco-Cola’s restricted stock plan results in its ability to retain the key individuals throughout their entire careers.

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