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PBG » Topics » Why do we use earnings per share, volume and cash flow as the criteria for our performance-based compensation?This excerpt taken from the PBG DEF 14A filed Apr 10, 2008. Why do we use
earnings per share, volume and cash flow as the criteria for our
performance-based compensation?
In selecting the criteria on which to base the performance
targets underlying our short-term and long-term incentive pay,
we choose criteria that are leading indicators of our success,
important to our shareholders and external market professionals,
and relevant to our executives whose performance we strive to
motivate towards the achievement of the particular targets.
For our business and industry, we believe the most relevant
criteria on which to evaluate our success are earnings per share
(“EPS”), profit, volume of product sold, and operating
free cash flow (as defined in our earnings releases). We view
EPS as the best composite indicator of PBG’s operational
performance. The Committee, therefore, emphasizes EPS in
establishing performance targets for the Named Executive
Officers. In evaluating our performance against such EPS
targets, however, the Committee considers the impact of unusual
events on our reported EPS results (e.g., acquisitions, changes
in accounting practices, share repurchases, etc.) and may adjust
the results for purposes of determining the extent to which the
EPS targets were or were not achieved.
Short-Term Incentive. Under our short-term
incentive program, we establish performance targets that are
designed to motivate executives to achieve our short-term
business targets. Therefore, for the executives leading our
geographic business units, the Committee links the payment of
the executives’ annual bonus to the achievement of
year-over-year profit and volume growth targets, which are set
at levels specifically chosen for each geographic territory. The
Committee believes tying these executives’ annual bonuses
to local profit and volume growth is the best way to motivate
executives to achieve business success within the regions they
manage.
For our Named Executive Officers, the Committee establishes a
table of EPS targets that, depending on the level of EPS
achieved during the year, establishes the maximum bonus payable
to each executive for that year. No bonus is payable if EPS is
below a certain level. The Committee then uses its discretion to
determine the actual bonus paid to each executive, which is
never greater, and is typically much less, than the maximum
bonus payable. In exercising this discretion, the Committee
refers to a separately established EPS or net operating profit
before taxes (“NOPBT”) target, as well as volume and
operating free cash flow targets, which the Committee
establishes at the beginning of the year. For Named Executive
Officers with worldwide responsibilities, these targets are
typically consistent with the Company’s EPS, volume and
operating free cash flow guidance provided to external market
professionals at the beginning of the year. For Named Executive
Officers with responsibility over one of our operating segments
outside the United States, these targets are typically
consistent with the Company’s internal operating plans for
the particular segment. For the CEO, in particular, the
Committee’s discretion is also guided by reference to
certain qualitative performance targets (often related to
strategic planning, organizational capabilities
and/or
executive development). Notably, in establishing the actual
bonus paid (within the limit of the maximum bonus payable), the
Committee refers to the above quantitative and qualitative
factors, but
Table of Contents
reserves the right to pay a bonus at the level it deems
appropriate based on the performance of the Company and each
executive. The performance targets established by the Committee
with respect to the 2007 bonus are more fully described in the
Narrative to the Summary Compensation Table and Grants of
Plan-Based Awards Table.
Long-Term Incentive. The Committee provides
our long-term incentive in the form of an equity-based award
because it believes the price of PBG common stock is a strong
indicator of whether PBG is meeting its long-term objectives.
The Committee, therefore, believes it important that each
executive, in particular our senior executives, have personal
financial exposure to the performance of PBG common stock. Such
exposure results in a link between shareholder and executive
interests and motivates our executives to achieve and sustain
the long-term growth of PBG. Consequently, we are committed to
paying a significant portion of executive compensation in the
form of PBG equity. We are deliberate, however, in our use of
equity compensation to avoid an inappropriate dilution of
PBG’s current shareholders.
As a way of ensuring our executives remain motivated and to
bolster the retention of our executives, the Committee does not
provide for immediate vesting of our long-term incentive awards.
Instead, consistent with the three-year time frame with respect
to which we establish our strategic plans, the Committee
typically provides for a three-year vesting period for
equity-based awards. Executives must remain an employee of the
Company through the vesting date to vest in the award. For
equity-based awards that have no value to the executive on the
grant date, such as stock options, the Committee typically
provides for staged vesting of such awards over the three-year
vesting period (e.g., one-third vesting each year). For
equity-based awards that have value to the executive on the
grant date, such as RSUs, the Committee typically provides for
vesting of the award only at the end of the three-year period.
Typically, for awards to our Named Executive Officers that have
actual value on the grant date (such as RSUs), the Committee
also establishes an EPS performance target for the year in which
the award is granted. The achievement of this EPS target is a
prerequisite to vesting in the award at the end of the
three-year vesting period. The Committee believes such an
additional performance element is appropriate to ensure that the
executives do not obtain significant compensation if the
performance of the Company in the year of grant is significantly
below our EPS target. As our long-term incentive is designed to
reinforce our long-term business objectives, however, the
Committee typically establishes this one-year EPS performance
target at a lower level than the Company’s external
guidance. The Committee does so to ensure that executives only
lose the RSUs granted in that year if the Company misses its EPS
target to such an extent as to indicate that a performance issue
exists that is unlikely to be resolved in the near term. The
implementation of this additional EPS performance target also
ensures that the compensation paid through our long-term
incentive is deductible to the Company (see the section entitled
“Deductibility of Compensation Expenses” below).
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