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 PBGs 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 Companys 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 executives annual bonus is tied to individual non-financial goals which are qualitative and specific to the executives 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 Companys 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 Companys internal operating plans for the particular segment.
As a result of the 2008 introduction of individual, non-financial targets, the Committees discretion is also guided by the Chairman and CEOs evaluation of each of the other Named Executive Officers 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 PBGs 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 Companys 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).