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PBG » Topics » Why do we use earnings per share, volume and cash flow as the financial criteria for our performance-based compensation?This excerpt taken from the PBG DEF 14A filed Apr 7, 2009. Why do we use
earnings per share, volume and cash flow as the financial
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
financial criteria on which to evaluate our success are
comparable (or operational) 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 comparable EPS
in establishing performance targets for the Named Executive
Officers. In evaluating our performance against such EPS
targets, the Committee considers the impact of unusual events on
our reported EPS results (e.g., acquisitions, changes in
accounting practices, share repurchases, etc.) and adjusts the
reported results for purposes of determining the extent to which
the comparable EPS targets were or were not achieved. The
comparable EPS performance targets and results utilized by the
Committee under our compensation program are generally
consistent with the Company’s publicly disclosed EPS
guidance and results.
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
80% 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 a substantial portion of 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. Beginning in
2008, 20% of each senior executive’s annual bonus is tied
to individual non-financial goals which are qualitative and
specific to the executive’s area of responsibility. The
Committee implemented these goals to reinforce the importance of
certain non-financial business objectives.
For our Named Executive Officers, the Committee establishes a
table of comparable 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
comparable 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 comparable EPS
or net operating profit before taxes (“NOPBT”) target,
as well as volume and operating free cash flow targets, and
individual non-financial targets, all of which the Committee
approves at the beginning of the year. For Named Executive
Officers with worldwide responsibilities, the financial targets
are typically consistent with the Company’s EPS, volume and
operating free
Table of Contents
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.
As a result of the 2008 introduction of individual,
non-financial targets, the Committee’s discretion is also
guided by the Chairman and CEO’s evaluation of each of the
other Named Executive Officer’s performance against these
targets. In addition, consistent with past practice, the
Committee separately considers the performance of the Chairman
and CEO and is guided by reference to certain pre-established,
non-financial targets specific to the Chairman and CEO (often
related to strategic planning, organizational capabilities
and/or
executive development).
Notably, in establishing the actual bonus paid for each Named
Executive Officer (within the limit of the maximum bonus
payable), the Committee refers to the above financial and
non-financial targets, but 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 2008 bonus are more fully
described at page 33.
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 intrinsic 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 a comparable 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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